Life Settlement Firms Face Jumbled Regulatory Picture
Some states might tinker with their life settlement laws in 2005, and more will revise their life settlement regulations. But the overall compliance picture probably will be about as jumbled in 2006 as it is today, experts predict.
“The problem is that the regulations differ from state to state and that in some states they change from day to day,” says Doug Head, president of the Viatical and Life Settlement Association, Orlando, Fla. “We believe consistent regulation is a good idea.”
Head is hoping Rep. Michael Oxley, R-Ohio, chairman of the U.S. House Financial Services Committee, will make progress with advancing his insurance regulatory road map reform bill.
If Oxley succeeds, one road map bill provision could foster federal support for creating a uniform viatical and life settlement law.
Reselling products is common in most financial services markets. In the stock market, for example, most investors who buy stock from parties other than the issuing company are participating in the resale market, or “secondary market,” for that stock.
But secondary markets for life insurance got off to a bad start in London in the 1700s, when some of the insureds who auctioned off their policies ended up floating in the Thames, according to Ed Graves, chairman of life insurance at the American College.
Financial advisors who wanted to help people with AIDS and other terminal illnesses developed the modern U.S. secondary market for life insurance in the 1980s.
The National Association of Insurance Commissioners, Kansas City, Mo., and the National Conference of Insurance Legislators, Albany, N.Y., began developing model laws and regulations to govern the market in the 1990s.
The NAIC completed the current version of its model law in 2000 and the current version of its model regulation in June, and NCOIL completed the current version of its model law in July.
Today, buying life insurance policies from the insured is legal in all 50 states and the District of Columbia. But 18 states have laws that govern both viatical settlements and life settlements, 18 states have viatical settlement laws, and 14 states have no laws that deal specifically with the secondary market for life insurance, Head says.
Some states have based their laws closely on models approved by the NAIC or NCOIL, but others have their own idiosyncratic, homegrown laws, Head says.
One of the most controversial regulatory issues has been the licensing of the agents and brokers who work directly with viatical and life settlement clients. Nearly everyone agrees that the brokers ought to have some kind of insurance license, and discussions went on for months at the NAIC over whether to require brokers to get an extra life settlement broker license. In June, however, the NAIC ended up deleting a separate life settlement broker licensing requirement from the final version of its model regulation.
The American Council of Life Insurers, Washington, and the National Association of Insurance and Financial Advisors, Falls Church, Va., agree that arranging a life settlement is different from selling a life insurance policy and that life settlement brokers ought to have additional credentials to engage in that business. The ACLI and NAIFA are continuing to urge states that consider the new NCOIL or NAIC models to add separate life settlement broker licensing requirements, group representatives say.
Although the licensing issue gets more attention, the issue that has the biggest effect on the viability of a states secondary life market might be pricing limits.
The NCOIL model prohibits states from directly regulating the prices that buyers pay for policies, but the NAIC model gives states the authority to set minimum price limits, Head says.
Some states that have focused on protecting the terminally ill sellers in the viatical settlement market require a buyer to pay the seller a price equal to at least 50% of the policys face value.
Companies that buy unwanted policies from relatively healthy senior citizens usually pay less than 50% of the policys face value, Head notes.
In practice, the difference in pricing for viatical settlements and life settlements means that a 50% rule shuts out life settlement deals, Head says.
In the real world, most complaints about life settlements have focused on low prices for policies or efforts to misrepresent the health of the insureds to investors, according to Howard Goldblatt, government affairs director at the Coalition Against Insurance Fraud, Washington.
In recent years, “weve been happy to see the efforts to get the bad apples out of the industry paying off,” Goldblatt says.
Reproduced from National Underwriter Edition, September 16, 2004. Copyright 2004 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.