Property rights of life insurance policyholders are surfacing as an issue during discussions over product standards language being developed for the Interstate Insurance Product Regulation Commission.
Among the issues being raised are whether insurers have a right to ask questions in an application about whether the applicant has discussed the possibility of a life settlement and whether they can include “right of first refusal” clauses in life insurance contracts.
The Interstate Compact is a body that will approve policy filings for life insurance products. As part of that function, regulators at the National Association of Insurance Commissioners are developing language for standards for product approval.
If the working group approves the wording, it would then be sent to the speed-to-market task force and ultimately to the product standards commission of the Compact Commission.
Regulators agreed to language that would permit companies to ask in an application whether an applicant had entered into an agreement or contract prior to the application to settle a contract. Carriers could also ask if a policyholder had ever sold other contracts.
But prior to that decision, members of the life settlement industry and Birny Birnbaum, an NAIC funded consumer representative and executive director of the Center for Economic Justice, Austin, Texas, argued that a broad policy of questioning did not serve consumers well.
Representatives for the American Council of Life Insurers, Washington, argued that insurers should have the right to include such a question.
It is part of an insurer’s right to evaluate an application and decide if it is business the insurer wants, said Michael Lovendusky, an ACLI associate general counsel.
Miriam Kroll, ACLI vice president, long term care, noted that the underwriting process looks at a lot of information and should include information that becomes available from this question. There is nothing new about these questions because they are being approved in all jurisdictions, she added.
Birnbaum said he did not think it is an appropriate question and that carriers should not just be allowed to collect information on consumers. If insurers feel that stranger-owned life insurance is a problem, then any question should specifically address that problem, he says. But, there should not be a general question that “could kill” the secondary market, he noted. “If there are speculator problems, then tailor the question. Don’t take away the basic rights to viaticate or settle policies.”
And even if states are currently approving such language, Birnbaum said, that does not make it right. “We are creating a national policy here.”
Doug Head, executive director of the Life Insurance Settlement Association, Orlando, Fla., said that if a company uses an application to gather information that it doesn’t need, the application should not be approved by regulators.
If someone is planning to sell a policy, that is not something that can be denied under current law, he says. Insurers are concerned that their retention rates will increase, he adds.
However, Head noted that if there was a contract before the application to sell the life policy, then “that’s bogus. That’s wrong. We’re with them.”
If there is just a discussion before an application about the possibility of selling a policy, “that is none of their business,” he said. Discussing a life settlement option is actually another reason to buy a policy, Head added.
Head said LISA plans to raise the issue when it goes to the working group for approval during the NAIC fall national meeting in St. Louis.
Another issue addressed during discussion of potential Compact wording was the right to assign a contract as it relates to contract wording regarding “right of first refusal.” The discussion centered around whether an insurer can include contract language that requires a policyholder to offer it the right to buy a contract before it is offered to the secondary market.
During a discussion on the issue, regulators expressed a general feeling that unless there were specific tax or legal reasons for including the “first refusal” language, the policy was the property of the contract holder. As such, they argued, the contract holder should have the right to use the policy as deemed fit.
Jim Walker, a Florida regulator, explained that it would not be right to require a Chevy owner to sell his car back to a Chevy dealership.
But ACLI’s Kroll said there can be situations in which products are not suitable for assignment. If, for example, a contract holder assigned a contract to 5 different parties and a company had to make sure the contract maintained qualified status, then that would create an administrative burden on a company.
But LISA’s Head says that “insurers are going to have to identify some consumer interest in not having assignment liberty or the Compact standard will be unrestricted assignment and unrestricted ownership rights. Most consumers assume they have these rights now and I do not see how the Compact can be honored and still restrict them.”