A packed hearing on the issue of the growing use of life insurance purchased by investors brought together CEOs, state insurance commissioners, the life settlement industry, producer groups, institutional investors and consumer advocates. Testimony ranged from the need to stay focused on the insurable interest of a policy to arguments that consumers should be able to use an asset to its best advantage.
Over 250 industry attendees filled the May 3 hearing of the Life Insurance and Annuities "A" Committee of the National Association of Insurance Commissioners. Nine insurance commissioners were present.
Life insurers are expressing increasing concern over what they say is the growing practice of investors who are financing the purchase of life insurance contracts largely from wealthy, older consumers with whom they have no insurable interest. Repeatedly, company CEOs as well as Frank Keating, CEO of the American Council of Life Insurers, argued that the industry faces the loss of public confidence and the loss of favored tax treatment for contracts. They argued that those losses would come at a cost to consumers.
Life settlement companies maintain there is a legitimate need for a secondary market in which an insured can sell a policy that is no longer needed.
And representatives of the premium financing industry argue there are many good reasons for the practice and that the good should not be mistaken for unethical transactions that take place.
Consumer advocates who weighed in were split over whether consumers should have the right to use a contract as deemed appropriate or whether it would cause them financial harm.
During testimony, insurers noted on several occasions that they did not oppose life settlement contracts, or policies already in existence. It was the purchase of contracts that did not already exist for investment purposes that they opposed.
North Dakota Insurance Commissioner Jim Poolman said regulators will start work to better regulate settling policies and that possible solutions will begin being discussed during the summer NAIC meeting.
"I think that there is consensus that premium financing with the intent to settle is something that we absolutely have to address," Poolman said following the hearing. Among the options that will be looked at is a five-year moratorium on the settlement of a life policy once it is purchased, he said.
"The concept of insurable interest is really key," said New York Superintendent Howard Mills of the proceeding. New York co-hosted the event, titled "Premium Financing of Life Insurance, Life Settlements, and the Relationship with State Insurable Interest Laws."
New York already has tightened the definition of insurable interest and the NAIC should consider steps that would do this nationally, he added.
The New York department's general counsel issued guidance in December 2005 that found in a particular case under review, premium financing was used to help buy policies for resale rather than for the insured's benefit.
Seymour Sternberg, chairman, president and CEO of New York Life, started the day of testimony, declaring that stranger-owned life insurance is a "contrived transaction designed from the start to get contracts into the hands of speculators."
Premium financing differs from life settlements because life settlements are contracts in which the insureds no longer have a need for the insurance, while SOLI contracts are contracts initiated at the behest of investors.
Sternberg said New York Life and other companies support changes to the NAIC's Viatical Settlement Model Act, but he also said that New York Life could support a regulatory requirement creating a five-year moratorium on settling a contract after it was purchased.
SOLI "reduces human life to the status of gambling chips," said Bruce Boyea, chairman, president and CEO of Security Mutual Life, Binghamton, N.Y. It exposes insurers and their customers to the potential loss of preferential tax treatment, he added.
