Fraternal Benefit Societies - Producer Services : Bureau of Insurance

January 14, 2008

To: Maine Resident Producers with Fraternal Appointments
Re: Fraternal Benefit Societies

The Bureau of Insurance has developed some concerns about marketing efforts on behalf of some fraternal benefit societies. These concerns have developed especially from a number of recent inquiries from consumers and discussions with producers. We are therefore writing to every resident producer who is appointed with any fraternal benefit society, in order to help inform the producer community of these issues.

There have been very significant increases in the recruitment of members and the corresponding purchase of some fraternal benefits. Some of these increases have pertained to Medicare Supplement coverage, and some have concerned life insurance. It is apparent that many consumers who have joined fraternal benefit societies and enrolled in the societies’ insurance programs are not aware of the fundamental differences between fraternal benefit societies and traditional insurers.

It is equally apparent that many licensed producers who are soliciting and enrolling such consumers are also unaware of these differences. It appears that some solicitations have been based primarily upon premium/price differences almost exclusively, without regard to these legal and practical distinctions between insurance companies and fraternal benefit societies. As licensees, of course, all producers are required to understand the products and services they are selling. We are therefore reminding you of this obligation.

Some of the important points to keep in mind concerning fraternal benefit societies relate in particular to what would happen in the event that there are any issues in the future regarding claims paying ability, and are as follows:

Fraternal benefit societies are not covered by the provisions of the Insurance Code except when specified. Therefore, a number of consumer protections that are frequently presumed to exist are inapplicable, and it is important for producers and purchasers to know the difference. For example, the specific Insurance Code chapter governing the terms of Medicare Supplement coverage does expressly apply to those sold by fraternal benefit societies, but the coverage is not covered by guaranty funds when sold by fraternals.
Fraternal benefit society insurance benefits are legally required to be assessable. In the event that a society’s claims paying ability becomes impaired, the members may be required to pay their proportional share of the deficiency. This is in keeping with the longstanding traditional status of fraternal benefit societies as charitable and benevolent organizations, as to which the members are both recipients of and providers of mutual benefits among the membership as a whole.
Fraternal benefit societies are subject to significantly reduced capital and surplus requirements, and are not rated by A.M. Best or an equivalent.

Every specific fact situation is different of course, but please be aware that the Bureau of Insurance considers it essential for licensed producers to provide at least the basic level of information that allows consumers to make informed choices. While it is not possible for this letter to itemize every aspect in which fraternal benefit societies differ from commercial insurers, the list above should serve to provide you with some important information that you can use to inform your clients and, frankly, help avoid claims that consumers received misleading information.

At a minimum, consumers should be aware of all of the above points when considering enrolling in a fraternal benefit society, especially the facts that they are assessable and not covered by guaranty funds.

In addition, these points need to be made in realistic fashion, rather than treated as mere technicalities. We have, for example, become aware of statements on the part of some producers suggesting that the presence of reinsurance somehow makes up for the fact that fraternal benefits are assessable and not covered by guaranty funds nor subject to otherwise applicable capital and surplus requirements. For a number of reasons this would be an inaccurate impression to leave with a consumer.

In sum, it is important for producers and their consumers to understand the products being offered. While true in its own right for any purchase or enrollment, it is also specifically required when making comparisons between any existing coverage a consumer might already have and a different product for which they would terminate their previous coverage.

The standards under the Insurance Code applicable to producer conduct and competence remain the same, whether the producers are soliciting on behalf of insurers or fraternal benefit societies. As noted above, a thorough product understanding is of particular importance when comparing the insurance benefits provided among the members of a fraternal benefit society and the terms of coverage provided by insurance companies.

Thank you for your review of the points in this letter. We hope that it will help you to remain in compliance with your obligation to provide your clients with accurate information to enable them to make informed decisions.

Very truly yours,

Eric A. Cioppa
Acting Superintendent of Insurance

Bureau of Insurance

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