The old Ruritanian proverb–”Don’t use a sledgehammer to kill a fly”–came to mind as I reflected on one of the actions that came out of the winter meeting last month of the National Association of Insurance Commissioners.
The action I’m referring to was taken by the NAIC’s Life Insurance and Annuities “A” committee, which unanimously voted to effectively put a 5-year ban on the ability of policyholders to settle a life insurance contract. Yes, there are exceptions written into the revision of the NAIC’s current Viatical Settlement model regulation, but for all intents and purposes it is a 5-year prohibition that has been enshrined.
The fly in this case is the issue of non-recourse premium financing for stranger- or investor-owned life policies. The sledgehammer, needless to say, is the 5-year ban.
I don’t mean to minimize the seriousness of STOLI by calling it a fly. It is a terrible practice and should be regulated out of existence. This is something that all the major players involved with this issue–and that includes life insurers, life settlement providers and brokers, regulators–agree on.
By most accounts the incidence of non-recourse premium financing arrangements has declined very significantly. A large part of this is accounted for by the fact that some companies which were all too happy to write such business (either unwittingly or by turning a blind eye) have now stopped doing so. Also, the best known life settlement companies say they won’t accept such business.
So why the 5-year sledgehammer for a problem that is looking more and more fly-like? The truth is, who knows? Jim Poolman, the North Dakota insurance commissioner who came up with the 5-year ban proposal, has never really spelled out in detail the answer to the question: Why 5 years?
If one were pulling a number out of a hat, I guess 5 years would be as likely as any to come up. But why not 3? Or 4? Or even the time-tested 2?
For Poolman to say as he did when the revision passed the “A” committee that “it surgically removes the cancer of STOLI and builds in consumer protection for people who decide to settle their contracts” is disingenuous at best.