The increasingly charged debate over investor-owned life insurance and non-recourse premium financing was on full display during a session at LIMRA International’s Advanced Sales Forum, held here last month. Proponents said third-party investors enable insureds to acquire policies cost-effectively and receive fair market in the event of a policy sale. Opponents said the investor-initiated transactions amount to trafficking in human lives and will prove damaging to the industry.
“Investor-initiated life insurance is not about appropriate life settlements or the financing of life insurance,” said Stephan Leimberg, president and CEO of Leimberg Information Services, Bryn Mawr, Pa. “It’s about collusion to evade the law. It’s a scheme to circumvent what 200 years of legal precedent would not permit strangers to do directly.”
Greg Jenner, executive vice president of taxes and retirement security at the American Council of Life Insurers, concurred, adding: “These synthetic transactions are a self-inflicted wound on the insurance industry, the sole purpose of which is to dodge the law.”
The session’s two other panelists–David Goldman, a vice president of the Life Finance Group at Credit Suisse Securities; and Alan Buerger, CEO of Coventry First and Coventry Capital–did not dispute the contention that the nascent IOLI market is rife with abuses. But they insisted that regulation, rather than a ban on non-recourse premium-financed transactions, is the way to rein in bad actors. They also questioned whether opponents of IOLI (also described as “stranger-owned” life insurance or SOLI) are sincere in their desire to permit “legitimate” life settlements.
Buerger pointed to efforts carried out by insurers and their legislative arms that aim to restrict policy sales. Among them: pronouncements from the ACLI that agents are “not competent” to advise on life settlements; and instances where producers have purportedly warned insureds that they risk being murdered if they pursue a settlement. Buerger additionally flagged carriers that have imposed unnecessary paperwork on settlement applicants; and a bill that came before the New York State Legislature, which, if enacted, would have prohibited life settlements within the first five years after a policy’s acquisition.
Underpinning the resistance to the secondary market, Buerger said, is the insurance industry’s opposition to insureds’ receiving fair market value for their policies, an amount typically greater than the policies’ cash surrender value. He added that life settlements also threaten carriers’ ability to offer competitive pricing, as industry premium rates assume that a percentage of policies in force will lapse.
But a clampdown on policy sales, he warned, will come at the expense of consumers.
“A system without sufficient cash value makes the rich richer, and the poor poorer,” said Buerger. “Those people who can’t afford to keep their insurance in force–they’re the losers in society. What Justice Brandeis said 100 years ago in reference to policy lapse rates is as true today as it was then: The mortality rate of life insurance policies is 10 times the mortality rate of insureds.”
Buerger and Goldman said their companies have adopted carrier-approved safeguards that aim to assure proper execution of settlements and premium-financed solutions; and that protect insureds from nefarious third-parties that may seek to acquire their policies.
Buerger noted, for example, that Coventry requires of applicants a personal guarantee that their policy loans will be repaid. They also demand a written disclosure form stating the client has consulted with an advisor about the need for insurance. Goldman added that Credit Suisse now offers products that require clients to pay a portion of the premium or to offer collateral for the policy loans.
“There is a right way to do these transactions,” said Goldman. “You have to ensure that you’re dealing with reputable players through background checks. You also have to work with the carriers when drafting questionnaires to assure that clients understand the transaction being proposed.”
Leimberg was unimpressed.
“If we put aside the transactions which are not financed with the intent to sell and focus only on those deals which are investor-initiated and are designed to put the insurance into the hands of investors, then I’m going to say the thing stinks from the beginning and cannot be fixed [through safeguards]. As a society, it simply is not acceptable to allow investors to profit from a person’s death.”
Buerger insisted, however, that regulation of secondary market transactions is the appropriate way forward. And he invited IOLI opponents to collaborate with life settlement and premium-financing players on legislation to address outstanding issues.
Jenner expressed skepticism the two sides could find common ground, contending that Coventry has a history of proposing controls that are self-serving. Ultimately, he said, new regulation will have to focus on the economic aspects of transactions to be effective.
“Virtually all of these deals are structured so there is an economic benefit [to a third-party investor],” said Jenner. “Legislation that deals only with the legal issues won’t get to the root cause of the problem, which is the economic compulsion to [sell] later on. These policies are designed economically, if not legally, to put the policies in the hands of investors.”