While regulators and advocates for the life settlements industry clash over proposed measures to curb abuses within the market, the agents who see both the bad and the good of the market up close believe that some drastic measures may be necessary to weed out the bad actors.
“This whole business seems to be one that’s perfectly positioned for a 180 degree change,” says Richard Flah, a principal with Flah and Company, part of Partners Financial in West Palm Beach, Florida.
There are numerous agents and brokers looking to do life settlements transactions in the area, and not all of them appear to be entirely up to par ethically. As an example, Flah notes a full-page ad in a local newspaper for a seminar for consumers on selling their policies. “It’s a well oiled marketing machine to set up” stranger- or investor-originated life insurance policies, he says.
Part of the problem, he continues, is that there’s a great deal of money–”millions and millions of dollars”–to be made selling life policies, and he notes that some of the people looking to make deals are working more for the money than to build a career.
The market for life settlements is continuing to grow in the region, Flah says, and his company is receiving a steady stream of offers. “We’re approached on a routine basis; not a week goes by without a consumer or a co-professional approaching us about a transaction.”
Lori Denison, also a principal in the company, says given Flah and Company’s location and surrounding population, the sheer number of deals could lead to more problems than are being seen elsewhere.
“Maybe, because we’re in South Florida, we see a lot more train wrecks than normal,” she adds.
Outside of Florida, the market appears to be somewhat less robust. Robert Rubin, a senior vice president and insurance advisor at Wachovia Insurance Services in Charlotte, N.C., says that while he used to receive regular calls inquiring about life settlements, he hasn’t received any in 4 or 5 months.
Rubin says he has been involved in several life settlement transactions over the past 2 years, but also adds that Wachovia does not advertise its life settlement services. Wachovia advisors will bring them up as an option for clients if the circumstances are right, he notes, but the company does a significant amount of research and due diligence before proceeding with any transaction.
For Flah, those who aren’t conducting their due diligence are a major part of the problem facing the industry. In 20%-30% of the instances in which he is called to help with a transaction, he says, the co-professional has “blurred the lines” between non-recourse premium financing and more traditional life settlement transactions.
Flah notes that many agents themselves are unaware of what is involved in a life settlement transaction, and that, as an example, such transactions are usually not covered by a standard agents’ errors and omissions policy. While agents may be covered if they are dealing with a life settlement firm, he says that “it’s important for an agent to know” because they would likely be a part of any litigation brought over the transaction.
“They would definitely be named,” he says, adding that he expects “a lot more litigation in the next few years” over deals that do not work out as planned as the industry grows.
Given the problems facing the life settlements market, some agents are not as cool to the National Association of Insurance Commissioners’ model law and its proposed 5-year moratorium on selling policies in certain circumstances, as are some of the life settlements companies.
“In the long run, it’s going to be better for consumers,” says Denison. She notes that the NAIC is trying to tread a fine line between legitimate life settlements and the more questionable non-recourse or stranger-originated life insurance policies, and that “the whole investor-originated rampage is still going on.”
The ban would not apply to policies with recourse financing, where the policyholder “has some skin in the game.”
The proposal, she says, “is not that egregious,” and much of the opposition she believes is coming from those who have gotten involved in less than legitimate transactions.
“They have IOLI policies that are starting to mature,” she says, “and their funders are starting to back away.”
Rubin says part of the problem is that the selling of a life policy to investors is not a misdeed, but that obtaining the policy with the intent to sell is the heart of the problem.
“When a life settlement is being done 2 years down the road, the damage in essence has already been done,” he says, noting that companies routinely ask potential clients if they plan to sell the policy. If the consumer says no, Rubin asks, “what do you do then?”
He acknowledges that the proposed ban is a dramatic step, but also that it may be what is necessary to effectively weed out the bad actors in the market.
“Short of a draconian measure,” he says, “I don’t know what can be done.”
The stakes to agents on the issue are high. Although he is not very active in the life settlements market, Chris Foster, an agent with Compensation Systems Inc. in Greensboro, N.C., says he is worried about what effect they could have on other life products, and specifically on the tax treatment of death benefits.
“Settlements have their place,” he says, “but in the right place and under the right circumstances.”
Investor-originated transactions, he says, “are so far out on the fringe they could damage the benefits life products have enjoyed for years in the tax code.”
The proposed 5-year moratorium, Foster believes, would likely be effective. “It would prevent people from buying a policy with the intent to sell,” he says.
Although supportive of the current measures to weed out bad actors, Flah sounded a note of concern that while he believes the market, and those in it, will mature over time, those bad actors fighting to stave off the current proposals could provide fodder for truly overbearing regulation. “Over time, it will get better,” he says, “but there will be so many distasteful acts between now and then that the pendulum could swing the other way.”