In insurance, sometimes it’s not what we don’t know that creates risk, but what we’ve believed for so long, we’ve stopped questioning it.
Take this one:
“Sure, in some situations we pay interest on delayed life claims, but we also earn investment income in the meantime, so it balances out.”
Sounds reasonable. Until you do the math.
Welcome to The Illusion of Knowledge – a new blog series from The Berwyn Group that takes a closer look at familiar insurance beliefs that sound right, but don’t always hold up under scrutiny. These assumptions can quietly skew risk assessment, invite regulatory attention, and distort the data that supports sound underwriting decisions.
We’re kicking off the series with life claims, examining why the logic of interest earned versus payout timing breaks down once you run the numbers.
Why Delaying Life Claims Doesn’t Pay
Several operational decisions are built on long-standing assumptions that feel correct on the surface but unravel when examined more closely. These ideas often persist because they’re intuitive, yet they carry real financial, regulatory, and reputational consequences.
One recent example jumps out:
“While we do owe statutory interest on late-paid life claims, the investment income earned during the time the funds were held helps offset that cost.”
At first glance, this logic appears sound. After all, earning yield on an asset seems beneficial. But when broken down, this thinking is more illusion than insight. And it could be costing carriers far more than they realize. Let’s walk through why.
- Interest Is Owed on the Whole Benefit, Not Just What You Set Aside
Often times this is a big misunderstanding. Statutory interest laws—like those in Illinois—calculate interest based on the entire benefit amount (for example, a $50,000 life insurance payout), not just the reserve amount held on the books. So, while a portfolio may earn 4–5% on a $4,000 reserve, the company is paying 6–10% interest on $50,000. That mismatch adds up quickly.
Quick math check:
- $50,000 delayed by 2 months at 6% = $500 owed in interest
- $4,000 invested at 4.4% for 2 months = $29 earned
That’s a $471 loss—and that’s being generous. In states like Illinois where the rate is 10%, the hit is even bigger.
- Statutory Interest Rates Outpace Portfolio Yields
Life insurers are currently earning around 4–4.5% on average. That’s not bad in a vacuum. But many states set statutory interest rates well above that:
- Illinois: 10% from date of death
- Florida: Based on Moody’s average corporate bond yield
- New York: Accrues from date of death based on §3214 rates
- Texas: From proof of loss to payment/offer
In every scenario, the statutory obligation exceeds the investment return. The “carry” is consistently negative.
- It’s Not Just About Interest, It’s About Risk
Even if the dollars “almost” work out (they don’t), the regulatory and reputational risk is a much bigger issue. States are now enforcing death detection with increasing rigor. Settlements tied to unclaimed life benefits and DMF (Death Master File) noncompliance have cost companies millions—not just in interest, but in legal exposure and headline risk. In other words: this isn’t just a finance issue; it’s a governance issue as well.
- You Might Be Leaking Money Elsewhere, Too
While a claim sits unpaid, it may lead to cascading operational and financial inefficiencies, including:
- Overpaying annuities or long-term care claims for deceased policyholders
- Missing out on reserve releases tied to untimely death recognition
- Wasting operational resources on avoidable clean-up
Even in states where interest only starts from “proof of loss,” early death detection improves outcomes across the board.
- The Bottom Line: Having to Delay Doesn’t Pay
The numbers don’t lie. The company is:
- Earning on a smaller base
- Paying on a larger base
- Doing it at a worse rate
- And inviting scrutiny you don’t want
The smart move? Prioritize early, accurate death detection. It’s not just the right thing to do, it’s the economically superior thing to do.
See how Berwyn helps insurers do exactly that.
Up Next, we’ll take on another one:
“We check the box and run the DMF according to the regs. That should be good enough.”
Spoiler: It isn’t. And even the government has stopped treating it like it is.
Until next time,
The Berwyn Team
