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Consumer Advocates, Insurers Weigh In On Life Settlements

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Consumer advocates say regulators should recognize the potential value of a healthy secondary market for life insurance policies when they update the Viatical Settlement Model Act.

The consumer advocates spoke here at the summer meeting of the National Association of Insurance Commissioners, Kansas City, Mo., at a consumer liaison session.

Birny Birnbaum, executive director of the Center for Economic Justice, Austin, Texas, and an NAIC-funded consumer representative, said secondary markets can do for the life insurance market what they already have done for the U.S. mortgage market and other markets.

The secondary market has helped homebuyers by attracting more capital to the mortgage market, Birnbaum said.

For consumers of life insurance, the rise of a healthy secondary market would provide a competitive alternative to nonforfeiture values and surrender values, Birnbaum said.

The recent rise of “speculator-initiated life insurance is certainly not something I would encourage,” Birnbaum acknowledged.

But stifling the secondary market to drive out the speculators would hurt consumers, Birnbaum said.

Birnbaum was particularly critical of proposals to restrict premium financing.

Insurers had no problem with premium financing when it involved financed single-premium credit insurance, Birnbaum said.

Life insurers that combine aggressive sales practices with policies designed using high lapse rate assumptions are causing arbitrage opportunities that might go away if insurers stopped using such high lapse rate assumptions, Birnbaum argued.

Bill Newton, a consumer representative with Florida Consumer Action, Tampa, Fla., said he has seen lapse rates of 30% or higher.

By addressing this issue, insurers and regulators may be able to avoid “draconian” restrictions on policies, Newton said.

In another session at the NAIC meeting, representatives from a number of trade groups gave the NAIC’s Life & Annuities Committee their thoughts on how to improve life settlement regulations.

The organizations participating in the session included the American Council of Life Insurers, Washington; the Life Insurance Finance Association, Atlanta; the Life Insurance Settlements Association, Orlando, Fla.; and the Life Settlement Institute, Hudson, Ohio.

Jim Poolman, North Dakota insurance commissioner and chair of the Life & Annuities Committee, said the committee would create a chart comparing the trade group proposals and also continue to consider the possibility of a five-year moratorium on the settlement of life insurance contracts.

ACLI, represented by Michael Lovendusky, said it wants to define viatical settlements broadly, to include “every imaginable transfer of a policy or the value of a policy,” and then back out legitimate transactions and transfers, excluding those instances from the requirements of the model.

George Coleman of Prudential Financial Inc., Newark, N.J., said the goal is to try and address premium financing at issuance when a settlement is contemplated. In particular, insurers are trying to avoid instances where these plans are “pitched” to wealthy individuals, who get two to three free years of insurance, a potential “kicker” or fee, and repayment of the loan, Coleman said.

Brian Casey and Scott Cipinko of Lord, Bissell & Brook L.L.P. spoke for LIFA.

Rather than creating a broad definition and then carving out exceptions, the revised viatical settlement model should include points such as ensuring that loan proceeds may not be used to pay upfront fees to those who take out a contract and making efforts to identify contracts taken out by individuals who plan to sell contracts later, Casey said.

Brian Freeman of Habersham Funding, Atlanta, representing LISA, said the model should make insurers notify consumers that a viatical settlement contract is an alternative to a request for a surrender, a request for an accelerated death benefit, a request to assign collaterally a contract as security for a loan, or a request to lapse a policy.

Doug Head, LISA’s executive director, urged that the current definition of advertising be broadened so that life settlement companies can explain the life settlement option to consumers.

LISA is considering options such as proposing that, for those consumers who want to settle their contracts, 80% of cumulative premiums paid in the first five years would have to be paid to the owner of the contract by the life insurer and that a life insurance company would have to pay the contract owner the highest amount that could have been realized if the contract had been settled, Head said.

These options would be considered if the settlement of a contract is restricted, Head said.

Brian Smith, president of the Life Settlement Institute and head of Life Equity L.L.C., Hudson, Ohio, suggested that the definition of a viatical contract should include any agreement in which consideration is received in exchange for the designation or transfer of a contract, or any premium financing agreement or collateral agreement entered into before the second contract anniversary, other than contracts not subject to the contestable period.