Prudential Financial Inc. suspending the distribution of MyTerm policies being sold by Wells Fargo & Co. may not have a major impact on the insurer's bottom line, but the company could be forced to deal with long-lasting legal and regulatory headaches.
The life insurance giant on Dec. 12 said it would review Wells' practices and suspend distribution of MyTerm, its simplified issue term insurance product launched in 2007, through all of the bank's branches and its website. Since 2014, Prudential has sold the product through a joint venture with Wells Fargo to the bank's retail customers.
Just three months after regulators sanctioned Wells Fargo for opening millions of new, unauthorized accounts, three Prudential employees filed a lawsuit in a New Jersey state court, alleging that Wells employees opened life insurance policies by following inappropriate steps. The three whistleblowers drew parallels between the opening of MyTerm policies and Wells' involvement in opening debit and credit card accounts, a scandal for which the bank paid nearly $185 million in fines.
Both companies could be looking at more lawsuits and more regulatory action, Steven Meyerowitz, director of FC&S Legal, said in an interview. Although the allegations in the Prudential case are similar to the bank accounts scandal, the life insurance matter involves an additional issue that did not come up in the Wells matter. Bankers are not allowed, by law, to be involved in the opening of life insurance policies, Meyerowitz said.
The whistleblower suit also suggests that consumers who could least afford the MyTerm policies, including lower-income Latinos in Arizona and several other states, were targeted for sales.
“If that turns out to be the case, that will be an unfortunate blemish on both Wells Fargo and on Prudential’s image,” Meyerowitz said.
Prudential may face "a lot of lawsuits and a lot of penalties," as a result of this matter, he added. "It [Prudential] has more litigation issues today than it did last Tuesday."
When Prudential surveyed its customers in 2015, it found no indication of potential fraudulent practices by Wells. But after the bank became embroiled in the sales scandal, Prudential decided to launch a larger investigation to look into sales practice and has suspended MyTerm until probe results come out.
In the legal drama that may ensue, the Newark, N.J.-based insurer may have to face questions as to how responsibly the company oversaw the MyTerm program and whether the company met all its obligations, Meyerowitz said.
The New Jersey Department of Banking and Insurance is already investigating the insurer's activities and role in the fraudulent issuance of policies, and Reuters reported that the state of California has likewise begun a probe.
"It would make sense that companies that underwrite products through which Wells Fargo distributes products would be taking a pause," Sandler O'Neill + Partners analyst John Barnidge said in an interview. Prudential's decision does not come as a surprise, given that Wells has already faced action by other state regulators. A number of state pension funds have said they will not invest in the bank and the city of Chicago has said it will not issue municipal bonds through the bank, Barnidge said.
However, the issue for Prudential only involves 15,000 policies, which may not be a large number for the company, Barnidge pointed out.
Term life sales in general are not a big part of Prudential's overall new business volume when it comes to individual life, the company's quarterly filings indicate. Of the $143 million in annualized premiums for that segment, only $52 million came from term life during the third quarter. Third-party distribution accounted for $115 million in annualized premiums.
MyTerm policies have low face values, and in terms of a total dollar amount, they may not be that large, Barnidge said. Prudential had $714.73 billion of face amount in term life in force during the third quarter, according to a filing.