State insurance regulators are touting the $17 million settlement they negotiated with Prudential in January as "an important step" in getting life insurers to cough up the estimated $1 billion they owe to life insurance beneficiaries. It's a step, all right, but in the wrong direction.Electronic money

This settlement gives the states which sign on - seven so far, including California - a small amount of money, but even that pittance will ultimately be divided by at least 20 states, the number which need to sign on for the deal to be approved. And since the money goes straight into state coffers, beneficiaries will never benefit.

Facing fraud charges

But Prudential will. The legal lingo in the agreement says nice things about the second largest domestic life insurer, at a time when it and the biggest, MetLife, face class action lawsuits charging them with fraud. And, thanks to a federal foul-up, the settlement may accomplish nothing at all.

Life insurers got in trouble last year when Florida Insurance Commissioner Kevin McCarty learned that they had been using a Social Security database called the "Death Master File" to stop annuity payments when they learned that those policyholders had died. Death Master is a long list of names, Social Security numbers, ZIP codes and dates of birth and death. But most of these same insurers hadn't been using this database to find life insurance policyholders who died, since they would then have to pay money owed to the beneficiaries.

Feet to the fire

The Prudential settlement theoretically holds the life insurer's feet to the fire, forcing it to run monthly updates to the Death Master File against its policyholder list. If any one of them has died, Prudential must take steps to track down the beneficiaries listed on the policy instead of waiting for these beneficiaries (some of whom may not even know they are owed money) to contact Prudential.

Make sense? Yes, except that the Social Security Administration (SSA) has now thrown a monkey wrench into this engine. As of Nov. 1, 2011, Death Master no longer has to include the names of nearly two-thirds of those who die. And at least four million names will be removed from the file.

If that's not enough, Texas Rep. Sam Johnson is pushing for a bill to make the Death Master File private, which would take insurers completely off the hook of finding beneficiaries.

Death is highly exaggerated

The SSA won't say why it's curtailing the Death Master file, other than claiming it never should have included many of the names in the first place. But this argument is specious, considering that the SSA has been selling this list, and making money on it, for more than 30 years.

As for Rep. Johnson, he says "identity thieves" are using the list, including some of the 1,000 names which mistakenly appear monthly but are still alive, according to a recent statement by the SSA inspector.

Meanwhile state insurance regulators continue to sign onto Prudential's settlement or, like New York Department of Financial Services Superintendent Benjamin Lawsky, cut their own deal with insurers. Either way, they are relying on a flawed, outdated and inadequate database to save the day. So you could say that this so-called settlement is DOA - dead on arrival.