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Changing Market Has States Looking At Life Settlements

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A rapidly changing life settlement market–that includes a growing number of permutations on selling a contract–is prompting life insurers to make their case before state legislatures as proposed legislation on settlements is being considered.

Life insurers are preparing for discussions of bills in New York and Louisiana as well as a hearing by the California insurance department, according to Michael Lovendusky, associate general counsel with the American Council of Life Insurers, Washington.

The ACLI is working with the National Association of Insurance Commissioners, Lovendusky says, but adds ACLI also does not have the “luxury” of just waiting on changes to the NAIC model. The reason, he explains, is because of the activity in individual states.

The bill in Louisiana, H.B. 1314, originally was scheduled to be discussed during a hearing on May 24, but on the evening of May 23 technical changes were made to the existing viatical law that moves it closer to the NAIC model, according to Whit Cornman, an ACLI spokesman.

The bill is sponsored by Rep. T. Taylor Townsend, D-Dist. 23. The ACLI had been concerned the bill would have legitimized SOLI transactions, Cornman says. The changes reduce the list of circumstances under which a life insurance policy can be viaticated in the two-year period after a policy is issued, he explains. That two-year period is in existing law, Cornman continues. The ACLI supported efforts to pass the amendment and H.B. 1314 was passed out of committee, he says.

Legislation in New York, Assembly bill 8785-A and its companion Senate bill 5476-B, is up for consideration by the New York legislature, whose session closes on June 23.

The bill reflects proposed changes being offered by the ACLI to the Viatical Settlement model act of the NAIC, says Diane Stuto, executive vice president with the Life Insurance Council of New York, Albany, N.Y.

It initially was raised last year as a joint effort of LICONY and Coventry Capital, she says. However, this year, because of a divergence in the definition of viatical settlements, that version of the bill will be advanced by LICONY, she says.

LICONY intends to provide legislators with input based on issues raised during the NAIC’s May 3 hearing on the issue (see NU, May 8). Discussion points will include premium financing, Stuto adds.

A two-year prohibition on the settlement of a contract unless it is shown that the viator is terminally or chronically ill is also included in the language, she says.

At press time, a New York insurance department spokesperson could not confirm that the department had submitted its own proposal and could not provide details of the proposal.

Nat Shapo, a senior vice president with Coventry Capital, Fort Washington, Pa., says his firm’s definition of a viatical settlement contract aggressively addresses inducements made to encourage a potential viator to settle a contract.

But, he adds, the Coventry proposal also affirms the proper use of an asset for collateral, which he says is backed by case law, instead of “eliminating the proper use of an asset.”

In California, a rulemaking hearing on viatical settlement regulations being considered by the California insurance department will be held on June 9. At press time, the department could not confirm what the proposed viatical regulation included.

As those interested in getting legislation passed in states press to see bills advanced by the end of legislative sessions, state regulators are continuing with efforts to revise the NAIC model. The NAIC is starting the work of compiling comments and reviewing testimony from the NAIC’s “A” Committee hearing held on May 3, says Jim Poolman, North Dakota insurance commissioner and “A” Committee chair.

That work will continue when the “A” Committee takes up the issue on June 11 during the summer national meeting in Washington, D.C.

The ACLI is recommending about 40 amendments to the NAIC’s model, says Lovendusky. Among the proposed revisions are changes to the definition of viatical settlements and to the section on prohibited practices.

The proposed changes to section 10 of the current model include language that would make it a violation of the act if a viatical contract were entered into “at any time prior to the application or issuance of a policy which is the subject of a viatical settlement contract” or for a two-year period starting with the policy’s issuance unless it is certified that the insured is terminally or chronically ill and certain administrative requirements are met.

The ACLI’s board also recently approved a proposal to explore approaching Congress to establish a 100% excise tax on the premium of a life contract that is settled within less than five years (see NU, May 22).

Poolman says the “A” Committee will look at proposals from both the ACLI and Coventry.

From information and testimony that has been presented, Poolman says, “there seems to be a sense of agreement that policies that are financed and purchased with the intent to settle are not legitimate.” However, he notes there are premium financing transactions that are legitimate.

Poolman notes there also seems to be traction for establishing a five-year moratorium on the settlement of life policies.

When asked about putting an excise tax on life insurance contracts, he says that he personally believes that is “a risky operation. Any time you ask Congress to start taxing your product, you run the risk of being on a slippery slope.”