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.
If this is what passes for surgical removal in the Peace Garden State, I think I’d rather trust one of the (actor) surgeons on “Grey’s Anatomy.”
Denying policyholders the right to settle contracts for 5 years after they’re initiated seems to me to be severely anti-consumer, not pro. For the life insurance business to back this proposal is another example of it supporting something that it is very likely to regret later on.
It’s analogous to regulators saying that life insurers could only sell policies that had a 5-year no-lapse guarantee. I invite you to imagine the hue and cry that would greet that proposal.
After years, if not decades, of trying to ingrain in people that life insurance is an investment, this 5-year hold is a slap in the face to the public.
There has to be a better way of stopping those malefactors who seek to do an end run around the legitimate purpose of insurance–one that is truly surgical. That approach would also ensure that policyholders who legitimately want to settle their contracts are able to do so.
When you use a sledgehammer to kill a fly, you also always bust a great big hole in the wall, as many rueful Ruritanians found out. Hence their wisdom.