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NCOIL Tells NAIC To Slow Down On Life Settlements

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Lawmakers present at a life settlement meeting organized by the National Conference of Insurance Legislators voted unanimously here to tell insurance regulators to hold off on updating their Viatical Settlements Model Act.

Members of the NCOIL executive committee then voted 24-2 to approve a resolution asking the National Association of Insurance Commissioners, Kansas City, Mo., to delay final action on any viatical model amendments until December 2007, after NCOIL completes its work on a life settlements model that addresses concerns about matters such as investor-owned life insurance.

Executive committee members rejected a substitute resolution proposed by Rhode Island state Rep. Brian Kennedy, D-Hopkinton, R.I. Kennedy suggested removing the request that the NAIC delay action and simply noting that NCOIL was addressing life settlements issues in its own model.

The NAIC’s Life Insurance and Annuities Committee recently sent a viatical model update up to the NAIC’s executive committee.

The model probably will go before both the NAIC’s executive committee and its plenary – the body that includes all voting NAIC members – later this week in New York at the NAIC’s own spring meeting, Kentucky Insurance Director Julie McPeak said here at the NCOIL meeting.

McPeak, chair of the NAIC’s Life and Annuities Committee, said the update will address banking groups’ concerns about the possibility that the current update draft might illegally restrict legitimate lending transactions.

The NAIC may avoid adding language regulating investor-owned life insurance placed in trusts because of concerns that adding a trust provision would slow adoption of the model update, McPeak said.

Speakers at the NCOIL executive committee meeting noted that NCOIL has to address life settlement issues quickly because state legislatures are starting to consider bills based on the NAIC model.

The North Dakota Senate already has voted unanimously to pass a bill based on the NAIC model, speakers here said.

But NCOIL executive committee members were eager to emphasize that the ultimate authority over life settlements lies with elected legislators, not with insurance regulators.

“Is the NAIC making suggestions as to what it feels is best for legislators?” Georgia state Sen. Ralph Hudgens, R-Comer, Ga., asked McPeak after she talked about NAIC viatical model activities.

Some NCOIL executive committee members asked whether NAIC model efforts to restrict use of life settlement arrangements are fair to consumers.

The current NAIC model includes a “moratorium” that would require many consumers who buy life insurance policies with borrowed money to hold the policies for 5 years before selling the policies through life settlement transactions.

The model would include some exceptions for consumers who undergo major life changes and those who buy coverage using loans secured by “unencumbered assets.”

The requirement that policy owners who buy coverage with borrowed money hold policies 5 years before selling “doesn’t stand a chance in a court of law,” said Michigan state Rep. Fulton Sheen, R-Otsego, Mich. “Isn’t private property and any limit [on it] a constitutional issue?”

The 5-year holding rule would place a legal penalty on policyholders, penalizing business owners who buy policies for legitimate reasons but do not need the policies after 2 or 3 years, said Pennsylvania state Rep. Robert Godshall, R-Montgomery, Pa.

McPeak said regulators are open to the work of legislators.

Stranger-owned life insurance “is very complicated,” McPeak said. “It is not easy to legislate intent, and if you come up with something better, then we would certainly look at it.”

Also at the NCOIL executive committee meeting and during interviews:

- Ohio state Sen. Steve Stivers, R-Columbus, Ohio, and Kentucky state Rep. Robert Damron, D-Fayette, Ky., asked whether consumers would be looking at life settlements if the cash surrender values for life insurance contracts were higher.

- William Fisher of Massachusetts Mutual Life Insurance Company, Springfield, Mass., who represented the American Council of Life Insurers, Washington, said changing pricing to reflect frequent use of life settlements could make life insurance unaffordable for consumers who are in their 70s.

“If you raise the cash surrender values, there will be a concomitant increase in premiums,” Fisher said.

Requiring consumers to hold policies 2 years before selling is not enough, because a 2-year holding period would still leave room for dishonest representations, Fisher said.

- George Coleman of Prudential Financial Inc., Newark, N.J., who also represented the ACLI, said Prudential has had to increase rates for older insureds because of concerns about stranger-owned life insurance contracts. STOLI firms are taking advantage of companies that offer lower rates for older insureds, Coleman said.

- Bryan Freeman, a vice president of the Life Insurance Settlement Association, Orlando, Fla., said life settlements are not doing much to change lapse rates, because most life settlements involve older consumers, and lapse rates for older policyholders are low.

If life settlement companies were targeting 30-year-old policyholders, that would be more likely to have a big effect on policy lapse rates, Freeman said.


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