Life Settlement Association Seeks To Step Up Accountability Standards
The nine-member board of the Viatical & Life Settlement Association of America, Orlando, Fla., agreed in a special meeting last month to pursue new levels of accountability for the industry. These include standardized good practices, increased self-monitoring and the possibility of future, impartial audit visits to members by teams of outside experts.
“Our members know that higher and higher standards of accountability are necessary if this industry is going to realize its full potential,” says Doug Head, executive director of the association.
The mainstream viatical and life settlement industry was created to meet the crisis of the AIDS pandemic, having existed previously in limited form, according to information from the association.
Viatical settlements enable people who are seriously ill to sell their life insurance policies for an immediate cash settlement. That practice soon led to life settlements, which also enable people to sell their life insurance policies, the association says. Rather than being generated by serious illness, life settlements generally are transacted by seniors and other high-net-worth individuals for estate and financial planning purposes, the association says.
Bryan Freeman, president of the association board and the founder of two Atlanta-based settlement companies, says the board intends “to change the very nature of our organization to morph it into a best practices organization that will require members to meet the best practices standards that the board of the BPO implements.
“We are aware that audits from third-party auditors to assure compliance are at the very heart of a good BPO and intend to work toward finding independent auditors to assess each applicant for certification,” he says.
The board currently is studying other best practices organizations “in an attempt to do the best job possible and to put the implementation of the BPO on a fast track,” Freeman says.
The standards currently in place that members must meet include a requirement to make a number of disclosures to purchasers. Those disclosures include that the annual return on a viatical settlement transaction depends on the accurate estimate of the insureds life expectancy and the timing of his/her demise, and that an “annual return” can never be “guaranteed,” the association says.
Also to be disclosed is the identity of the party or parties who would be responsible for future premiums after the investor buys the policy and how these premium payments are guaranteed.
If premiums are prepaid in escrow for a certain period of time, the identity of the party who would pay premiums if the insured lives beyond his/her life expectancy must be disclosed. That the policy may lapse if premiums are not paid must also be disclosed.
If a policy is on waiver of premium and the insureds health improves to where he/she is no longer disabled, the member company must disclose who would be responsible for the payment of premiums.
Also to be disclosed is that there are certain risks peculiar to group policies, owned by employers or other organizations.
The primary risk is the possibility that the owner or the insurance company may terminate the group policy. This termination will trigger the need to convert the group coverage to an individual policy.
Member companies must disclose whether there are any limitations or caps in the conversion rights and that additional premiums will have to be paid once the policy is converted, and must also identify the party responsible for the payment of the additional premiums.
Viatical settlement companies must disclose who determines the life expectancy of the insured, i.e., in-house staff, independent physicians, specialty firms that weigh medical and actuarial data, etc.
These parties make the determination of life expectancy based on medical evidence presented to the viatical company by the insureds physician and/or hospital. That developments in medical treatments or unexpected changes in the insureds medical condition could affect the accuracy of such determination must also be disclosed.
Also to be disclosed is that insurance companies may contest death claims for policies that have not been in effect for more than two years at the date of death and the death benefit payment could be denied on various grounds. The buyer must also be made aware that if the insured commits suicide within two years of the issuance of the policy, the insurance company may not pay the death benefits.
Also to be made clear is that the purchase of a viatical settlement should not be considered a liquid investment, since it is impossible to predict the exact timing of its maturity and the funds may not be available until the death of the insured.
Member companies should not offer buyers examples of matured policies and rates of return without disclosing how many other policies bought by that company are still outstanding–or have matured–beyond the estimated life expectancy of the insured.
Also to be disclosed is that under certain conditions, the insurance company may cancel the waiver of premium status on certain policies. In this event, premium payments will then be required and member companies must identify the party or parties who will be required to make those payments.
In addition to these disclosures, the association has an anti-fraud policy that disallows transactions involving the sale of newly issued life insurance policies bought with the sole intent to sell.
Without a showing of an unanticipated change in the health status and/or financial condition of the owner of the policy, the members of the association will not enter into viatical settlement and/or life settlement transactions within six months of the first issuance of a life insurance policy.
The board of directors of the association has adopted a plan to address this situation. It includes strengthening and renewing the associations anti-fraud statement to eliminate any possibility that its members will knowingly broker, sell or buy a fraudulently obtained policy and submitting a copy to the National Association of Insurance Commissioners, Kansas City, Mo.; National Conference of Insurance Regulators, Washington; North American Securities Administration Association, Washington; Coalition Against Insurance Fraud, Washington; and the 50 state insurance departments.
And, the plan includes a requirement that all member companies have an anti-fraud model in place.
“We will demand that insurance companies take steps to adopt at least minimum underwriting requirements on all policies, including guaranteed and jet issue policies to prevent fraud and to establish greater supervisory authority over the behavior and conduct of their agents,” the association says.
Reproduced from National Underwriter Life & Health/Financial Services Edition, September 26, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.