Insurance Industry Responds to Patriot Act

May 27, 2002

The insurance industry is preparing to adopt new policies and guidelines in efforts to safeguard their assets from money laundering-a decision that was brought upon due to the impending Patriot Act, legislation that cuts off funding to terrorist cells, according to the Associated Press.

The law will apply to financial-services firms, jewelers, travel agents, auto dealers, telegraph companies and some real estate firms.

On April 24, banks and securities firms were forced to adopt anti-money laundering policies, as well as add an internal complains officer and create a program to track their compliance.

Mutual funds, credit cards and check-cashing firms have until July to follow suit, and other business, including insurance companies and travel agencies, were given a temporary exemption while they wait for the Treasury Department to draft up regulations for those businesses.

Guidelines are expected for the insurance industry as early as June.

Among the concerns of the insurers include the possibility of funneling cash through a variable annuity, which closely resembles equity products. Annuities have the capability to make payments on an annual or monthly basis for either a specific period of time, or a lifetime, thus creating the possibility for funds to be funneled to terrorist cells by a third party.

Some funds even allow tax-free loans against the value of the annuity agreement.

A spokesman for the Insurance Industry Institute said that insurers are conducting internal evaluations to determine how to handle suspicious activity and also a congressional mandate that would allow them have more thorough knowledge of a customers’ background.

The Treasury Department is outlining requirements and thresholds for suspicious activity reports (SAR) based on each particular industry, which would vary the standards of SAR reports when submitted.

A Lehman Brothers analyst focusing on the property/casualty industry says that many p/c transactions aren’t easily traceable, thus making it difficult for money laundering to occur.

He noted that p/c insurers are more concerned with the impact of Sept. 11, focusing on increasing premiums and the difficulties in obtaining reinsurance.

Because of the decline in investment returns from insurers’ portfolios due to weakened equity markets, it will be difficult for companies to apply the higher premiums earned directly to rising expenses related to the Patriot Act.

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