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Monday, October 6, 2014

Strategic CSR - Employees

The article in the url below raises an interesting question – Can companies insure one of their most valuable assets, their employees?
"Employees at The Orange County Register received an unsettling email from corporate headquarters this year. The owner of the newspaper, Freedom Communications, was writing to request workers' consent to take out life insurance policies on them."
The twist is that, essentially, the company planned to take out individual life insurance policies on each of its employees, which means it would be paid in the event of the employee's death. In short:
"… the beneficiary of each policy would not be the survivors or estate of the insured employee, but the Freedom Communications pension plan. Reporters and editors resisted, uncomfortable with the notion that the company might profit from their deaths."
This is a question that is facing increasing numbers of firms:
"Because so-called company-owned life insurance offers employers generous tax breaks, the market is enormous; hundreds of corporations have taken out policies on thousands of employees. … Aon Hewitt estimates that … about one-third of the 1,000 largest companies in the country have such policies. Industry analysts estimate that as much as 20 percent of all new life insurance is taken out by companies on their employees."
It is also a problem that sounds much worse, depending on how you frame it. For example, I am not sure it is fair to claim that "the company might profit from their [employees'] deaths." It seems just as accurate to say they will be compensated for the loss of an important asset, but will still need to invest and retrain in order to replace that asset. I do not think these policies are set-up to incentivize firms to go around trying to encourage the death of their employees. Nevertheless, any attempt to put a value on a human life (something actuaries at insurance companies do every day) is liable to sensationalization in today's media:
"But critics say it is immoral for companies to profit from the death of employees, while employees themselves do not directly benefit. And despite a law enacted in 2006 that sought to curb the practice — companies now are restricted to insuring only the highest-paid 35 percent of employees, who must give their consent — it remains a growing, opaque and legal source of corporate profit."
What is more enticing (from the media's perspective) is that "Banks are especially fond of the practice":
"JPMorgan Chase and Wells Fargo hold billions of dollars of life insurance on their books, and count it as a measure of their ability to withstand financial shocks. … Bank of America's policies have a cash surrender value of at least $17.6 billion. If Wells Fargo had to redeem its policies tomorrow, it would reap at least $12.7 billion. JPMorgan Chase would collect at least $5 billion, according to filings with the Federal Financial Institutions Examination Council."
Where the issues become a little more ethically complex is that the payments firms receive are tax-free and are being relied upon to fund employee pension plans:
"Companies and banks say earnings from the insurance policies are used to cover long-term health care, deferred compensation and pension obligations. … And because such life insurance policies receive generous tax breaks — investment returns on the policies are tax-free, as are the death benefits eventually received — they are ideal investment vehicles for companies looking to set aside money to pay for pension plans. Companies argue that if they had to finance such obligations with investments taxed at a normal rate, they would incur losses and would not be able to offer the benefits to employees."
Take care
David Chandler & Bill Werther
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An Employee Dies, and the Company Collects the Insurance
By David Gelles
June 23, 2014
The New York Times
Late Edition – Final