On Oct. 4, National Underwriter Life & Health sponsored a roundtable at the Buckhead Club in Atlanta that brought together executives from several life settlement firms. The first event of its kind, the roundtable was an ideal setting for consideration of issues that are facing this quickly growing business at present and also for looking at the major challenges and opportunities that these executives will see over the next couple of years.
Steve Piontek, editor-in-chief of National Underwriter Life & Health, and Ramiro Rencurrell, president of the Life Insurance Settlement Association, served as co-moderators for the session. On page _ you will find a list of the life settlement executives that participated in the discussion. What follows is an edited version of the 2-hour roundtable.
RAMIRO RENCURRELL: One of the most important things going on right now is at the National Association of Insurance Commissioners and the Viatical Model Act that’s being rewritten. Some of the people around this table have been very active in giving their comments regarding the NAIC Model Act. But one of the important things is that North Dakota Commissioner Jim Poolman is still continuing to push the 5-year moratorium.
STEVE WASHINGTON:That issue was advanced by Commissioner Poolman at the May 3 interim hearing in New York City. We’ve actually done a lot of work through the Life Insurance Settlement Association to meet with commissioners to educate them on the issues surrounding life settlements. And on this particular issue we took the view that this is really not beneficial for consumers. This is actually going to harm consumers–it’s going to deny them access to the market value of their insurance policies. And as a result of our efforts we think that currently where that stands is that while that proposal is still being talked about, we’re hopeful that it might actually not succeed.
SCOTT PAGE: The 2 primary changes sought by LISA for the NAIC Viatical Settlements Act are (1) the recognition of life insurance producer authority to act as a settlement broker, holding those persons to the same standards applicable to viatical settlement brokers and recognizing that those individuals exclusively would represent policy owners in the course of transactions with settlement providers, and (2) recognizing that premium finance-based transactions would be subject to regulation just as viatical settlements are.
Our position is that the 5-year moratorium could ultimately be more destructive to the insurance carriers and providers than beneficial. The moratorium is designed to prevent people from purchasing life insurance policies “solely” for the intent of selling them once the contestability period has passed. However, this determination is nearly impossible to make and if this moratorium holds up, the carriers will end up alienating customers who would have considered a policy for so-called ‘legit’ purposes.
RAMIRO RENCURRELL:One of the things coming out of this NAIC hearing and the Model Act is the need for definitions and educating the public on what really is stranger-owned life insurance. Is it stranger-owned life insurance or is it investor-originated life insurance?
BRYAN FREEMAN:I think the interesting thing, getting back to the 5-year moratorium, is that the viatical settlement working group of the NAIC was together for roughly a decade. And numerous times over that decade they talked about what they should do about policies and how long before you should sell them. It was debated very passionately. And they made decisions that 2 years was a good place to be. That is consistent with the contestability and suicide period, in policies it gives the insurers time to re-look at their underwriting frankly if they want to do that.
There were longer periods discussed in the viatical settlement working group and they just wouldn’t go there because the commissioners at that time felt that they were already taking the property rights from people within 2 years, pretty much, in most states, except under a very limited set of circumstances. And what we would be doing, if we changed it to 5 years, we would further erode the people’s value in life insurance by adding another 3 years.
And what I think is fundamentally misunderstood about life insurance is that 40% of all policies lapse within 5 years. So 40% of all life insurance consumers will no longer have real value in their life insurance policies.
SCOTT PAGE: It’s well recognized–something that has stood, and must be permitted to continue to stand, the test of time–that insurance policies are assignable. It’s the dynamic growth of our industry coupled with the issues raised in the insurable interest context that brought this issue to the forefront of the insurance industry and life settlements in the first place. If the issue of insurable interest is resolved, I think the issue of assignability will retreat from its current emergence.
STEVE PIONTEK:Can I ask you what was the genesis of Commissioner Poolman’s 5-year proposal at this point; how did that come about?
BRYAN FREEMAN: I’m not 100% sure. But I can tell you this: It did not come from the American Council of Life Insurers. It did not come from us. So it came from somewhere else.
NATE EVANS: I think some of the more restrictive proposals such as the 5- year plan really have come out of some of the poorly conceived investor initiated non-recourse programs. This is unfortunate. Life settlements are one of the most consumer friendly innovations developed in recent times. And it’s too bad as a reaction to some of the poorly conceived programs that life settlements are getting dragged in. It’s hard for me to imagine the commissioners will go to something that is really so anti-consumer as the 5-year moratorium.
TED KILKUSKIE: I just want to take that a step further. I think rather than being poorly conceived, some of the [non-recourse premium financing] programs that have been offered are outright abusive. And I think they take advantage of consumers unfairly because of lack of disclosure and lack of identification on what the issues are and what the rights are, that many times consumers are giving up without fully understanding what they are buying. Now we have a situation where 34 states have laws that really looked at the 2-year contestability period, which I think is very fair to all parties, whether in a secondary market type transaction or not.
This gives time to research what’s happened, time to really have people protect their interests if they need to be protected, time for the consumer’s rights to be protected. And rather than educational and disclosure type proposals, which could be enforced and enacted within that 2-year period, there is an overreaction–for what reasons I’m not sure–to really take consumer rights away for that 3rd through 5th year. It doesn’t make any sense. In order to extensively protect consumers, somebody’s pulling out a sledgehammer where it’s more of a situation that they should be using a flyswatter to kill a fly. Go after the abuse, don’t harm the consumer.
DAN BOCKHORN:I think the key to that is that the insurance carriers themselves have all accepted those programs. Ninety percent of the time the carriers are aware of the lien or collateral assignment on the original ownership forms. So it seems to me that the carriers were and are very aware of who was actually originating the policies. And what they were looking at is adding premiums to their bottom line. And they weren’t concerned a couple of years back about who was originating the policy, whether that be a premium finance company or an insured. So now they’re reacting to the life settlement market. They are all aware that they were stranger-owned or investor-owned policies from the very beginning.
LARRY SIMON:You know what’s interesting is that the end of last year it became very evident when the carriers started closing down the non-recourse premium financing that they had the ability to do it. And I’d say they probably closed down 80/85% of the market just by their actions. So if they can self-regulate and watch what they’re selling then what’s the need for the 5-year program in response to that? The new programs coming out of the market are longer term programs–10 year programs, 15 year programs, no agreements to resell. It’s a whole different market today than it was a year ago, 2 years ago. Unfortunately, you had people abusing the system like you do everywhere, all the time, and trying to sell free insurance. But the market has corrected itself for the most part and those programs are not available. There are still some programs operating under cover, under the table, which we’d like to see go away. But for the most part the market has cleaned itself up. And the insurance companies have been a big part of saying, “No more.” So to go 5 years is just overkill. And again, it’s taking away the consumer’s right.
STEVE PIONTEK:But if the ACLI is not behind the 5 year thing then who is pushing it? Consumer advocates are against it.
BRYAN FREEMAN:It was probably an idea of one man.
ROB HAYNIE: The real issue is that there is an education deficit that exists between the consumer and their advisor on what this does. That’s all it is. I mean, to be honest with you it’s something that as an industry association, as individual companies, we need to work on every day to go out there and educate this marketplace.
STEVE PIONTEK:Can you speak to some of the educational efforts that you’re making in terms of consumers?
ROB HAYNIE: One thing we’ve done as members of an association is to increase membership, increase awareness. We’ve created materials that don’t brand an individual company, but instead a marketplace. What we’re doing today is a great step in the evolutionary process. We attend trade organizations as an association. We go out there. You know, the defense walls aren’t up. People are less intimidated to go up and hear quote, unquote, a sales pitch.
This marketplace is not that complicated when you break it down. You have a freedom, an opportunity to have an asset appraised that for years, or as long as anybody can remember, people never viewed as an asset, a tangible asset, which is your life insurance policy. This industry really hasn’t started yet; it’s still in it’s infancy. So you’ll see the wirehouses getting in.
TED KILKUSKIE: I think the best way to educate the consumer is through educating their trusted advisors, whether they’re producers, financial planners, etc. I think the best way to do that is through the delivery of continuing education programs, which are regulated. They’re filed with the states. They’re not marketing statements and they’re very factual. It’s been tried and true in the insurance business, particularly, for quite a while. And I just think that’s the best way to do it. Online is probably good, in person is even better. We’ve done [at Coventry] in the past 4 years probably more than 50,000 sessions and believe we’ve gotten a lot of benefit from it.
LARRY SIMON:We need to educate the people who represent the seller about what you can do, what you can’t do, what’s a good deal on a policy, what is a bad policy, when a person should be in a settlement, when they shouldn’t. This is not for everybody. Everybody shouldn’t be selling their policies. But in many cases, it’s a good investment alternative for those people.
BRYAN FREEMAN:You know, I think it’s important to actually look at the name of this too. I think the best name for this kind of insurance that is initiated in a way that none of us want to deal with is probably what Joe Belth called it, “Spin Life” because I see these people who are doing that and who have been the promoters of these programs as real speculators. And what he called it was, “Spin Life– Speculator Initiated Life Insurance.” We talk about investor-initiated, but really they are speculators. Because all the life settlement market is a stranger-owned life insurance market or investor-owned. So if we really boil it down, we’re talking about somebody who is speculating. And we really probably should decide we’re going to have a nasty name for it and probably let that be it.
As to education, one of the things that the Life Settlement Institute has been involved in is putting out a white paper educational booklet for members of Congress.
STEVE WASHINGTON:It has just been put together. So we actually now have copies of it. It will be used. We put it together in part to address the ACLI’s proposal which has not yet been formally submitted to Congress. We don’t know whether it will be, but it’s been floated in Congress, to impose a 100% excise tax on the acquisition cost of any “taxable acquisition” of an interest in an “applicable insurance contract” that’s been issued within its first 5 years. We need to bring the regulators up to date with how this industry has changed, about how now at this point institutional investors are the investors in this industry. And as well, there are other aspects which have really themselves changed. So we’ve prepared with respect to Congress a document that really is intended to serve as an educational tool that explains how life settlements work, what they are, statistics on lapse rates in policies and also to state a position on the excise tax proposal.
DAN BOCKHORN: One of the things that I’m concerned with as we talk about education is we seem to focus in only on the NAIC and educating those commissioners and insurance agents. But the business is evolving into the wirehouses and the broker-dealers. In New York we had a representative from the National Association of Securities Dealers talk at our luncheon. And I think it’s imperative as an organization that we not only focus in on the NAIC but we also need to focus in on the NASD and educate their governing body to have life settlements work within their wirehouses. Because as we know the majority of their representatives aren’t insurance licenses but the vast majority of them are NASD licensed.
So as we’re looking at paying out commissions to different representatives, we have to focus in and make sure that as an organization we’re educating the NASD reps so that those people can participate in life settlements with the expectation of being able to be paid and without having regulatory issues with the NASD. And I think that we should include those individuals in our meetings and actively invite their governing body to all of our meetings. Because I really believe that in the next year or 2, those are the folks that really are going to control the vast majority of the policies that are going to enter our market.
RAMIRO RENCURRELL:Dan, I think the message from LISA as an association is we’re not only seeking to get closer to the NASD, but we are now exhibiting in most of the industry shows: at the Association for Advanced Life Underwriting, the National Association of Insurance and Financial Advisors, the National Association of Independent Life Brokerage Agencies. We’re going to have a booth at the ACLI’s annual meeting. The message is that we are there. Come see us. Let’s talk and see how much we do agree on issues and want to resolve the issues because we agree that we have problems in the industry.
BRYAN FREEMAN:And I think as an industry we’re closer to the life insurance industry that most of them think. We actually have the same goals and aspirations. They want to sell more life insurance. We want to help them sell more life insurance because we want to help them make life insurance more valuable in the minds of consumers who don’t value it now. And any time you get a secondary market for any financial product, if you go back and look at mortgages or any other, the product becomes more valuable just because the secondary market exists.
RAMIRO RENCURRELL:On that note, let’s go to another issue–what responsibilities do the agents have to their clients to offer a settlement option and what are we doing as an industry or as individuals to educate these producers to present a settlement as an option?
TED KILKUSKIE:I think there is a fiduciary responsibility. These people are the trusted advisors for their clients and as so they represent themselves as showing their clients all options that exist in the market. And I think it gets down to educating the producers so that they understand what are the best options for their clients.
I also think some of the education really has to go to the carriers and the regulators. I’ve heard the term used quite a bit with what’s been going on with the business in the past couple of years–”throwing the baby out with the bathwater.” We get painted with a broad brush. I think one of the big problems with an emerging growth marketplace is that people in very important positions in carriers and in regulatory positions haven’t taken the time to educate themselves about the nuances in the market versus just looking at all financing in a certain way. And all of a sudden they try to regulate it with one broad stroke instead of separating the good from the bad. They’re throwing out the baby with the bathwater.
STEVE PIONTEK: It’s been said that insurance companies write a certain amount of policies based on the fact that they are going to lapse. So are they really against life settlements on a gut level because something they’ve been doing for a long time is invalidated by what you are doing.
JIM CAVOLI: Even John Skar from Mass Mutual, whom everyone knows, has said there has always been adverse selection, that the people who are on the shorter end of the life expectancy scale tend to have the lowest lapse ratios. So that’s who sells policies in settlements–people who have some impairment. It’s a bit of a red herring, I think, to say that this is going to drive lapse ratios a lot higher. Presumably most of the people who are doing settlements have those policies that would have a lower lapse ratio than the average.
STEVE PIONTEK:In one sense, it’s hard to see why agents wouldn’t do this when it’s so beneficial to their clients. But what happens if their company or their broker-dealer prohibits or says they can’t do it?
JIM CAVOLI: If agents are not allowed to present settlements, that is going to become a growing liability for very large companies who prohibit. The agent has some cover. My company tells me I can’t sell a policy, so who am I to tell you otherwise, right? But the companies are seeing a lot of pressure. And we’ve talked with many broker-dealers who are saying, “I don’t think we can keep doing this,” but the transaction is a good one. The carriers have even said so: “We love settlements. We just don’t like this 2 year thing. You know, these quick loans.”
But the reality is they are beginning to recognize that. All these people who are prohibited from the settlements in the past are going to have to be allowed to do them. I don’t know under what conditions. They’ll probably make some pretty strict rules, which is probably not a bad thing. As long as they protect consumers and don’t disallow the settlements to happen. But it’s probably where this is going to go. And those companies are going to have to loosen up.
DAN BOCKHORN:As we educate the broker-dealers it’s imperative that they offer a life settlement just like any other product. So I think that it’s our obligation to educate the broker-dealer and make sure the broker-dealer makes a profit off of this transaction like we do any other transaction. If they’re selling annuities, life insurance, life settlements, the broker-dealer needs to be compensated so that it’s a better financial tool for their field agents. That’s the bottom line.
SCOTT PAGE: Many broker-dealers recognize the potential in life settlements and have opened up their agent networks to exclusive groups of providers after a comprehensive due diligence screening process.
However, the continually evolving life settlement environment may provide its own structural solution to broker-dealers who do not permit settlement transactions. As life settlements become more prevalent, agents may abandon sales positions with insurers having such a prohibition, allowing them to provide the most comprehensive professional guidance to their clients. Ultimately leading insurers and others imposing such prohibitions to abandon those else they lose market share as agents leave their fold.
BRENT BUSH: Insurance companies had a lot of indigestion over the years from omitting to tell the customer a whole lot of issues–things that were benefits for the customer or different sales techniques that maybe they didn’t fully disclose. This is another benefit that they are going to have to support for their agents because it’s just another benefit for the customer that needs to be addressed. And they’re not going to stand for more hiccups in the courts.