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exception noted resulted from the fund's failure to obtain a signed acknowledgement of a widow accepting the lump sum amount in lieu of payment over a five year period. Addendum
Subsequent to the period under review, the Board of Trustees of the Local 295 Severance Trust Fund elected to terminate the individual whole life policies they had purchased during the first 2 years of their 3 year contract. The face value of these individual policies was determined by the members age at the time he became a member of the Fund, with the younger members receiving much greater coverage than the older members. For this type of coverage the STF had paid $1,531,234 during this 2 year period, with $1,029,457 of this amount being disbursed during the year which ended November 30, 1972.
After re-evaluation of the type of insurance coverage which had been provided, the Board of Trustees substituted group term insurance with constant coverage of $30,000 for each member, regardless of age. The yearly premium cost under this new coverage is to be $240,428 and is almost $790,000 less than what was dien bursed in the form of premiums for the preceding year.
First, that I make this affidavit at the request of Robert Dunne, Assistant Counsel of the United States Senate Committee on Government Operations, Permanent Subcommittee on Investigations, after a series of conferences. Harry O. Miller, Esq., General Counsel of First Executive Corporation and Executive Life Insurance Company of New York, has been given the opportunity of reviering this affidavit prior to my signature of it. I understand that this affidavit may be used in lieu of my testimony in an executive session or public hearing of the Subcommittee. I have been given a copy of the current rules and resolutions. I understand that the Subcommittee's inquiry is concerned with the propriety of the insurance aspects of labor/management severance plans involving Louis Ostrer.
Second, I am Chairman of the Board of First Executive Corporation, a California corporation which is a holding company for several insurance companies, one of which is Executive Life Insurance Company of New York,
Third, First Executive Corporation owns approximately 94 percent of the outstanding shares of common stock of Executive Life Insurance Company of New York,
Fourth, I personally and/or members of my family own or control less thin 5 percent of the outstanding shares of First Executive Corporation.
Fifth, Louis Ostrer's name was known in the insurance industry, and he had the reputation of being an excellent producer. For a number of rears--possibly six or seven or eight-I had been attempting to get him to write business through the subsidiary companies of First Executive Corporation. I would drop in to see him at his offices in New York City from time to time. He possibly wrote one small case, as he was a licensed agent with our company in 1967. The small commissions still payable on this case are not being paid because of the revocation of his license. His attempt to designate another payee was rejected by the company. We rejected several proposed cases he brought to us because they appeared to be bad medical risks. Since I was unsuccessful in getting any substantial volume of business, I stopped seeing him sometime before September 31, 1968.
Sixth, on December 31, 1968, First Executive Corporation acquired 74 percent of the outstanding stock of Citizens Life Insurance Company of New York, and on January 1, 1969, the name of Citizens Life Insurance Company of New York was changed to Executive Life Insurance Company of New York. Two of Ostrer's associates, Cy Reeves Snyder and Seymour Greenfield, had written business for Citizens Life Insurance Company of New York before the acquisition, and Cy Reeves Snyder continued writing a small volume of business with Executive Life Insurance Company of New York.
Seventh, I do not recall seeing Louis Ostrer between December 31, 1968 and March 25, 1970, when Ostrer appeared at my office in Beverly Hills, California, and described to me the concept of labor/management severance funds. Mr. Ostrer
described the concept to me, and emphasized the advantages over pension plans currently being offered to union employees. He was particularly enthusiastic about the appeal of the early vesting and the cash option to younger union members, and the social desirability of making the benefits easily portable. He described how most qualified retirement plans locked employees in and interfered with job mobility, and then failed to deliver benefits for a substantial percentage at retirement because of the lack of portability and reasonable vesting. Ile was certain that his severance plan concept, which he had already had approved by the Internal Revenue Service as a qualified retirement program under Section 401 of the Internal Revenue Code, would revolutionize benefit practices under collective bargaining. I am not sure whether he spoke specifically of Teamsters' Local 295, but he did speak in terms of hundreds of millions of dollars of face value insurance. I know he spoke of a group of Pan American employees at that time. He told me he had already written severance plans with a number of insurance companies including Manhattan Life Insurance Company, Beneficial National Life Insurance Company, and Transworld Life Insurance Company.
Mr. Ostrer said that he had designed the severance plans, and was acting as consultant to a number of trusts. He told me that as consultant, the trustees would accept his advice as to the insurance agent to be selected. He wanted my assurance that the company would pay commissions on substantially the same basis as Transworld Life Insurance Company paid for its severance insurance programs. He showed me his agreement with Transworld Life Insurance Company, and I advised him that if the arrangement were lawful we would be willing to pay the commissions at that level. I understood that the policies applied for would be on a guaranteed issue basis, and that Executive Life Insurance Company of New York would not be able to do individual risk selection. We reached an agreement then, in principle, that Executive Life Insurance Company of New York would advance the entire first year's premium to the writing agent upon production of any such severance fund case. Until six (6) weeks ago, that was the only appearance Louis Ostrer ever made at our California offices, to the best of my recollection.
Eighth, I was in New York City on October 21 and 22, 1970, and again on November 17 and 18, 1970, and saw Ostrer on both occasions. I am absolutely certain that by the November trip we were speaking specifically of Teamsters' Local 295, and specifically of a severance fund contribution by management of $15.00 the first year, $30.00 the second year, and $40.00 the third year, slightly less than half of which was to be available for the purchase of life insurance,
Ninth, I agreed then to advance the first year's coiomissions in cash as soon as the case was written. I had expected that the first year's premium would be received in one lump sum, but as it developed, the premiums were to be paid to the company in monthly installments. Consequently, I agreed to loan the writing agent an amount equal to the first year's commissions by taking back a series of promissory notes which were non-interest bearing, and which were repayable over the next four (4) years.
Tenth, I understood from my general association with people in the industry that Ostrer had had some difficulty with Canada Life Assurance Company. Ostrer sloughed off the importance of this, but we did discuss the fact that he was the consultant of the fund and had no current New York license, and that the insurance would have to be written through the agent and/or broker designated hy the trustees. He indicated that the trustees would accept his advice as to the agent. I understand that it is customary for a consultant and administrator to be consulted concerning appointment of an insurance agent. Additionally, Ostrer had produced data to me showing that he had similar arrangements with Foundation Life Insurance Company of America, Beneficial National Life Insurance Company, Transworld Life Insurance Company of New York, and Manhattan Life Insurance Company. The New York Insurance Department routinely allows first-year sales compensation of up to 96 percent, and we were only paying 50 percent. The severance program of Local 295 was split funded with only onehalf of the contribution applied to the purchase of insurance. This meant that first year sales compensation was approximately 25 percent of first year contributions. It is customary in the industry to split fund qualified retirement plans where individual life insurance policies are going to be used to fund part of the benefits.
Eleventh, I want to make it clear that as far as this company was concerned, Louis Ostrer controlled the placing of the severance fund business with us. He had designed the plan and the trustees would rely upon him for advice as to which insurance company should be selected, and it was my policy to take those steps
which he proposed in order to accomplish the writing of the case. I do not recall meeting either Dina Gelman or Cy Reeves Snyder before they were selected as writing agents. This is not unusual. In response to your specific question, I do not believe that the company in any way violated any law of the State of New York, and a number of reputable New York insurers obviously came to the same conclusion as attested to by the fact that they wrote identical programs before Executive Life Insurance Company of New York was selected as the carrier for Local 295's severance program.
Twelfth, the actual case was originally written through an agent, Cy Reeves Snyder. I have never met Mr. Snyder in my life. Some weeks or months later, the paperwork on the obtaining of a general agent's license in New York for Ostrer's sister, Dina Gelman, were completed, and all of the promissory notes, guarantees, commission agreements and other papers connected with the case, which were originally written under Cy Reeves Snyder, were routinely transferred to Dina Gelman and her agency. At the same time that commissions were assigned to Dina Gelman, she assumed the promissory notes evidencing the loans which had originally been made to Cy Reeves Snyder.
Thirteenth, although many of the documents in connection with the Local 295 severance program were executed on behalf of the company by Norbert F. Lochner, its basic negotiations were carried on by me, and the legal documents were drafted by Harry O. Miller. Mr. Lochner executed documents confirming agreements which I had made, and, I believe, relying on the advice of Harry 0. Miller.
Fourteenth, in about the middle of 1971, we made a determination, based on our experience in this case, that from an actuarial point of view, it was a bad case from the company's point of view. Death claims were considerably higher than anticipated. We informed Ostrer that if the company was to take on the second year's business--which was equal in premium dollars to the first year's businessthere would either have to be a reduction in the face value of the insurance written approximating 15% for the same premium, or else a renegotiation of the commission rate which in substance would amount to dropping the persistency bonus. Ostrer complained that he was not in a position to reduce the face amount of the policy for the second year, and refused to take a reduction in the commissions payable to the agent, since other companies were willing to take the business at the old premium rate, and at the old commission level. Consequently, we were no longer interested in writing the second year increment. Notwithstanding, at his request, we prepared a letter to the trustees asking for a $50,000.00 advance in premiums for this second year. This letter was dictated in substance by Ostrer. At the time the letter was sent, there appeared to be a possibility that commission levels could be renegotiated.
Fifteenth, between the time that the letter referred to in the preceding paragraph was written, and the time that the decision was made as to who the carrier would be, the actuaries of Executive Life Insurance Company of New York were in contact with Manhattan Life Insurance Company, Transworld Life Insurance Company of New York, and Beneficial National Life Insurance Company. Executive Life Insurance Company of New York pooled all raw data as to premium, claims, and commissions for all cases, and reached a determination that the severance programs were not profitable for us. The companies cannot make money unless there is a tremendous improvement in the mortality rate, which does not seem likely. I understand that the second year's insurance was written through Transworld Life Insurance Company of New York, who advanced 90 percent of the first year's premiums to the writing agent.
Sixteenth, the only other time that Ostrer was in our California offices was March 31, 1972. He stated he had just arrived from Las Vegas and had a very large severance fund case involving the culinary workers there, which would involve some $2,000,000.00 per year in premiums. He asked for $100,000.00 advance to the writing agent, Seymour Greenfield, against future commissions, although the case had not been written. I refused.
Seventeenth, the type of insurance written is actually known in the trade as "group ordinary life," and the premiums paid are routine for this type of insurance. The New York Insurance Department has advised the trustees of Local 295 that the commissions paid in connection with their severance program exceed the commission rate in the NAIC Code of conventional practices. The New York Department concedes that the NAIC Code of conventional practices does not have the force of law in New York.
In addition, we are convinced that the commission rates set in the Code were meant to apply to group term insurance. No substantial amount of group term
was sold at the time the Code was adopted, and commission levels paid by Executive Life Insurance Company of New York in connection with the severance programs are similar to commission levels paid in connection with group permanent ordinary life by other New York insurers. The Manhattan Life Insurance Company, for instance, pays up to 96 percent of first year's commissions on ordinary group life, and total commissions of about 165 percent over the first ten (10) years. There is nothing that would prevent the trustees of the severance fund in dealing directly with us. There is no need for the intervention of a broker and/or agent in an insurance matter, but it would be illegal for us to quote a lower rate in dealing directly. It would be technically and legally feasible to experience rate the ordinary life policies written in connection with severance programs, and give experience rating credits if justified by earnings. However, this would require a different premium rating structure similar to the rating structure for participating business, and with the bad mortality experience involved, I do not know whether it would have been advantageous for the trustees of Local 295. Such an experience rating approach would probably require approval of the New York Insurance Department, and in the past they have consistently exercised their power of approval to prevent the smaller New York life insurance companies from competing with the large eastern mutuals. A relatively new insurance company Congressional Life of California, has no agents, and conducts all its business by mail. Although I am not intimately acquainted with its operations. I don't believe that its product is any cheaper than products sold by companies which do business through agents.
Eighteenth, I have been deeply concerned about the aspects of the severance fund insurance currently being written, and believe the federal government should consider the passage of legislation which would permit insurance companies to deal competitively—with or without agents/brokers-for this new type of business. Possibly, the companies could be permitted to quote a standard rate and compete on the basis of an "experience refund” as the actuarial experience developed over the years, I strongly support the idea that qualified retirement plans should be changed to provide for earlier vesting and portability of benefits. A man should not be tied to a particular location or a particular company, and it is wrong for a substantial percentage of the people covered under pension plans to finish their careers with no pension benefits.
Nineteenth, in June, 1971, Ostrer requested that an additional loan of $20,000.00 be made to Seymour Greenfield. I agreed because premiums on the Local 295 case were coming in somewhat higher than expected originally.
Orto Forst. On this 31st May, 1972, before me, the undersigned, a Notary Public in and for Baden-Baden personally appeared Otto Forst, known to me to be the person whose name is subscribed to the within affidavit, and acknowledged to me that he executed the same.
Witness my hand and official seal:
Notariat II Baden-Baden.