The Regulation of Specialty Policies in Life Insurance: Comment

Abstract

solution finally reached by Kimball and Hanson in their careful and scholarly study of the regulation of specialty policies is the prohibition of such policies.' This is a convenient and simple solution. purpose of my examination of the paper is to see whether it is justified or whether some less radical solution might be in the best interests of the public. paper does not fail to give consideration to important values, such as freedom of competition, freedom of contract, freedom of access of new entrepreneurs to the market, and, to a limited extent, the opportunity for innovation in the life insurance business. Their conclusion is that these considerations are outweighed by the possible damage which specialty policies may do by encouraging misrepresentation and satisfying something different from the true insurance needs of the purchasers. In their study of the subject the authors take up separately several varieties of specialty policies or benefits. Let us consider them one by one. authors devote some sixteen pages to the question of tontine policies and in part of their discussion are less critical than the industry and supervisory officials generally have been with respect to this * Lloyd K. Friedman, F.S.A., is a consulting actuary in Houston, Texas. 1 Spencer L. Kimball and Jon S. Hanson, The Regulation of Specialty Policies in Life Insurance, Michigan Law Review, Vol. 62, No. 2 (December, 1963), pp. 167-258. particular form of policy. In my discussion I do not propose to consider this matter further. It is my feeling that this type of life insurance contract was discredited many years ago and is prohibited by the laws of most states. It experienced a brief revival in a few states in the 1950's but is not believed to be any problem at the moment. As far as I am concerned, the tontine policy has been and should be prohibited. second type of specialty policy considered is a policy designated by the authors as profit-sharing. They use this term to designate policies in which the promise is made to pay, as dividends on such policies, earnings derived from other policies, generally nonparticipating policies but perhaps from the entire business of the company. authors explore the legal status of this case and come to the conclusion that statutory provisions of most states regarding discrimination, rebating, advisory board contracts, and securities are sufficient to make this form of policy illegal. Their conclusions are based on the Uniform Unfair Trade Practices Act. Again, in my opinion, in the view that this type of policy is and should be illegal, the authors are correct. It seems improper for two reasons: (1) It violates the fundamental principle of insurance that each policyholder shall share equally in the risk according as his risk appears at the inception of the policy. (2) It purports to give the policyholder a sort of ownership inter-