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New NAIC Viatical Model Draft

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Life insurers, life settlement companies and consumer representatives are gathering their thoughts on the most recent draft of the Viatical Settlements Model Act, which updates an earlier model adopted by the National Association of Insurance Commissioners, Kansas City, Mo.

The model is being reviewed by the NAIC’s Life Insurance and Annuities “A” Committee following discussion at the NAIC’s fall meeting last month in St. Louis.

Comments are currently being received until October 23, after which it is anticipated that a conference call will be held.

North Dakota Insurance Commissioner Jim Poolman has said he hopes the draft will move out of the “A” committee to the NAIC’s executive committee and plenary by the end of the year so that it can be ready for commissioners and state legislatures at the start of 2007.

While allowing that this timeline is “aggressive,” Poolman says he thinks it can be achieved.

Poolman says that at a hearing in New York this summer, there was support for a 2-year moratorium on the sale of life policies. The 5-year measure proposed in his draft offers, he says, a margin of conservatism to ensure that inappropriate stranger-owned life insurance cannot be sold.

There is general support among a number of commissioners for a 5-year proposal, he says, adding, however, that a straw poll has not been taken.

“We are completely supportive of the fundamental concepts of the Poolman amendments,” including a 5-year prohibition on the settlement of life insurance contracts, according to Michael Lovendusky, associate general counsel with the American Council of Life Insurers, Washington.

ACLI, along with the Association for Advanced Life Underwriting, the National Association of Insurance and Financial Advisors, and the National Association of Independent Life Brokerage Agencies are conducting an “exhaustive” review of the latest draft, according to Lovendusky. The industry efforts are “very inclusive,” he adds, and include discussions with financiers, lenders and settlement providers.

Approximately a dozen changes could be recommended by the industry once discussions and a review are completed, says Lovendusky.

He says he believes it would be possible to have a revised model to executive and plenary at the NAIC by year-end.

Lovendusky says the Poolman amendments differ from an initial industry proposal in several ways. The industry proposal was a 2-year rather than a 5-year proposal; the industry proposal more narrowly defined a life settlement, while the Poolman amendments more liberally define such contracts to include certain financing arrangements; the industry draft backed in some of these financing transactions by stating that traditional financing arrangements would be exempted; and the Poolman proposal offered consumers additional protections.

“We will offer modifications to that proposal” in order to “try and define specific issues raised and addressed,” says Doug Head, executive director of the Life Insurance Settlement Association, Orlando, Fla.

LISA’s comments will seek to address transactions that are a “cloak for inappropriate non-insurable interest transactions,” he continues. But, Head adds, “Our efforts are to sustain consumer rights [in legitimate transactions.]“

Head asserts that LISA has always been opposed to inappropriate sales.

One of the specific areas that will be addressed is the “disclosures and affirmation” section of the model, he continues.

LISA has opposed a 5-year moratorium on the settlement of contracts as a provision that would take away consumer rights.

Two points that need to be discussed are the definitions of premium financing and life settlements, which are “a little narrow,” says Scott Cipinko, of the law office of S.J. Cipinko, Atlanta, who represents the Life Insurance Finance Association, Atlanta.

Another point Cipinko raises is about the need for a 5-year moratorium on the settlement of a contract. The ability to settle a contract is “a property right just as with anything else,” he notes. “If a house could not be sold for 5 years [after its purchase], you would have a revolt on your hands.”

Cipinko says the draft represents a lot of work on the part of regulators, but adds that the moratorium does not address the issue of investor-owned life insurance.

What he says needs to be developed is an insurable interest law similar to the one that he says Georgia has on the books. “The issue here is insurable interest and not viatical settlements,” he adds.

Birny Birnbaum, executive director of the Center for Economic Justice, and a NAIC funded consumer representative, concurs.

“I continue to be puzzled by the insistence on the 5-year provision. It is pretty clear that it hurts consumers who will not be able to sell a product in the secondary market.” Even though there are some exceptions, such as the loss of a job or a divorce, it is “still a pretty radical extension of the 2-year provision which in and of itself took away consumer rights.”

And, according to Birnbaum, it is not addressing the spin life, or speculator-initiated, problem. Additionally, Birnbaum says, there has been no evidence presented to indicate whether the practice is widespread. Rather, he continues, what has been presented are “company memos on how spin life is threatening company profitability.”

The reason that profitability is threatened, according to Birnbaum, is that too many companies have relied on lapse supported pricing, which he says offers consumers little value if they surrender a contract. Consequently, consumers saw a way to receive better value for their contracts, he adds.

Birnbaum says his concern is that if the model is adopted by the NAIC, it will become a standard in 28 states that are part of the Interstate Insurance Product Regulation Compact Commission.

NAIFA, Falls Church, Va., is working with ACLI and AALU on an industry response to the latest draft, says Ron Panneton, senior counsel for law and state relations and Gary Sanders, senior counsel for law and state relations with NAIFA.

NAIFA would like to stick with Poolman’s essential approach, according to Sanders, but would like to further close any openings that would permit stranger-owned life insurance to be sold.

Panneton says NAIFA supports the 5-year moratorium for sales that apply to the stated problem of STOLI. But, he continues, NAIFA would support lifting the 5-year ban for transactions that are not STOLI transactions.

In particular, those transactions are full recourse financing agreements and situations in which the premium is paid by the insureds, both he and Sanders say. For those products, after a 2-year moratorium, life settlements should be permitted, they say.


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