The National Association of Insurance Commissioners could discourage aggressive premium financing arrangements by asking states to make consumers wait at least 5 years before selling life insurance policies through life settlement transactions.
North Dakota Insurance Commissioner Jim Poolman talked about NAIC interest in premium financing arrangements here shortly after a hearing on premium financing and state insurable interest laws organized by the NAIC’s Life Insurance and Annuities Committee.
The hearing attracted more than 250 participants, including 9 insurance commissioners.
Regulators will be addressing the premium financing market at the NAIC’s summer meeting, Poolman said.
“I think that there is consensus that premium financing with the intent to settle is something that we absolutely have to address,” Poolman said.
Imposing a 5-year moratorium on the settlement of a life policy once it is purchased may be one of the options considered, Poolman said.
Investors have been buying unwanted life insurance policies from policyholders for more than a decade through life settlement transactions.
Now life insurers and regulators are worrying about financing efforts designed to create life insurance policies specifically for the resale market.
In a typical arrangement, a premium financing firm might lend a consumer the money to keep a large life insurance policy in force for 2 years, during the “contestability period” when insurers have a relatively easy time challenging policy applications before paying claims. Once the contestability period expires, the firm might strongly encourage the consumer to sell the policy to strangers who have no insurable interest in the consumer’s life.
At the premium financing hearing, insurance company executives and trade group officials, such as Frank Keating, chief executive of the American Council of Life Insurers, Washington, attacked the concept of “stranger-owned life insurance” transactions powered by premium financing arrangements.
SOLI is a “contrived transaction, designed from the start to get contracts into the hands of speculators,” said Seymour Sternberg, chairman of New York Life Insurance Company, New York.
SOLI “reduces human life to the status of gambling chips,” said Bruce Boyea, chairman of Security Mutual Life Insurance Company, Binghamton, N.Y.
If SOLI continues to let speculators bet on unrelated consumers’ mortality, Congress may see that as an excuse to reduce or eliminate the tax breaks now accorded to life insurance and annuity products, speakers said.
“The concept of insurable interest is really key,” said New York Superintendent Howard Mills.
New York already has tightened its definition of insurable interest, and the NAIC, Kansas City, Mo., should consider taking steps to encourage all states to do so, Mills said.
Sternberg said New York Life could support the proposal to make policyholders wait at least 5 years before selling new policies.
But many of the insurance company executives and regulators who spoke said they believe consumers should have the right to sell unwanted policies through life settlement transactions.
William Newton, an NAIC-funded consumer who is executive director of the Florida Consumer Network, said he opposes the idea of making consumers wait 5 years to sell life insurance policies.
Premium financing can be a useful tool for saving consumers money, and consumers should be able to get better value for their policy if they can find it, Newton said.
Alan Buerger, president of Coventry Group Inc., Fort Washington, Pa., a life settlement firm, estimated that the life settlement industry has paid policyholders at least $4 billion more over the past 5 years than they would have received if they had simply surrendered contracts for the cash surrender value.
Corporate-owned life insurance and bank-owned life insurance are examples of insurance contracts that insurers commonly sell to investor third parties, Buerger said.
“These are truly investments,” Buerger said. “They are sold, and, as employees leave, the insurance stays in force.”
Jim Sinnott, executive vice president of Life Solutions International, San Diego, spoke at the hearing for the Life Insurance Finance Association, Atlanta.
Although LIFA does not defend every premium financing transaction, there are legitimate uses for many such transactions, Sinnott said.
If a financing company makes full disclosures to consumers and carriers and the financing is not simply a life settlement in disguise, there could be legitimate use of the product, Sinnott said.
In that case, Sinnott said, the need to decide intent could be minimized.