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.
David Woods, CEO of the National Association of Insurance and Financial Advisors, Falls Church, Va., said there is “deep concern with the direction this type of transaction is taking our industry.” Woods was also representing the Association for Advanced Life Underwriting and the National Association of Independent Life Brokerage Agencies.
Pennsylvania Insurance Commissioner Diane Koken asked executives where regulators should draw the line on contracts that should and should not be settled.
The level of “rhetoric” raised by insurers over SOLI and investor-owned life insurance was criticized by Bryan Freeman, president of the Life Insurance Settlement Association, Orlando, Fla. “There would be no problem if such contracts were not issued in the first place. To get a policy issued, there has to be complicity with the carriers.”
Alan Buerger, chairman and CEO of Coventry Capital, Fort Washington, Pa., noted, among other points, that the life settlement industry paid out $4 billion-$5 billion over the last five years in excess of the cash surrender value that would be available under surrendered contracts.
Corporate-owned life insurance and bank-owned life insurance are examples of insurance contracts used as investments and sold by the insurance industry to investor third parties, Buerger added. “These are truly investments. They are sold and as employees leave, the insurance stays in force.”
Consumer advocates were split on the issue of premium financing. William Newton, an NAIC-funded consumer advocate and executive director of the Florida Consumer Network, said premium financing can be a useful tool for saving consumers money and added that consumers should be able to get better value for their policy if they can find it. Consequently, he said that he opposes the five-year prohibition on settling policies.
But in written testimony, Joseph Belth, editor of The Insurance Forum, wrote that speculator-initiated life insurance only benefits promoters. Insureds are not told that promised payments to them are “bribes or that some day there may be legal problems relating to acceptance of the payments.” Insurance companies who participate in these transactions risk financial loss and loss of reputation, Belth concluded.
But Bob Thompson, a partner with InsCap Management, New York and Nashville, Tenn., argued there is a place for premium financing. He told regulators that the insurance industry, like other financial services industries, is going through an evolution. No policies associated with his company have been settled to date, according to Thompson. His firm, he said, does not finance premiums with the idea of settling them.
What is important, Thompson continued, is to ensure that it is clear where the capital comes from, how the firm interacts with the consumer, and whether the transaction is “fair and legitimate.”
After his firm completes a transaction, the structure is like an asset-backed security in which the “balance sheet exposure is transferred to institutions in the asset-backed security marketplace.”
But Robert Cook, executive vice president and CEO of John Hancock, Boston, noted there are many different types of programs and they are morphing rapidly.
He said that one hedge fund with which he met to get a sense of what these investors saw in insurance said their interest in life insurance was yield-driven. With yields on Treasuries at a two-year low at the time of the meeting and fixed income spreads compressed, the fund was looking for different assets, and life insurance policies could offer a 7% improvement over yields it was getting.
Stan Tulin, vice-chair of AXA Equitable, New York, told commissioners, “I do not sit here concerned about the economics of the life insurance industry” but rather, “the franchise, the high hill the industry has stood on. It is nefarious to have speculation on human life and to allow it. I am not suggesting anything untoward. But why allow it? It makes no sense.”
Tulin said that he would like to see more regulation and disclosure, and a five-year prohibition on settling contracts.
Jim Sinnott, executive vice president with Life Solutions International, San Diego, spoke for the Life Insurance Finance Association, Atlanta. He said that while LIFA did not defend every premium financing transaction, all such transactions should not be prevented. The reason, he explained, is that there are legitimate uses for such transactions.
If there is full disclosure for consumers and carriers and financing is not, in fact, disguised life settlements, then there could be legitimate use of the product and the whole issue of trying to decide intent could be minimized, he said.