State insurance legislators voted to send a strong message to state insurance regulators that they are moving too fast on the regulation of stranger-owned life insurance.
During the spring meeting of the National Conference of Insurance Legislators here, legislators emphasized that the decision ultimately rests with them. State Sen. Ralph Hudgens, R-Ga., summed up the feelings of many legislators when he asked Julie McPeak, Kentucky insurance director and co-chair of the Life & Annuity “A” committee of the National Association of Insurance Commissioners, “Is the NAIC making suggestions as to what it feels is best for legislators?”
McPeak spoke to legislators because a Viatical Settlement model act was just advanced out of NAIC’s “A” Committee and is awaiting action at its Executive Committee and Plenary.
During a March 2 special meeting on life settlements, NCOIL legislators voted unanimously to endorse a resolution that requests the NAIC to delay final action on amendments to its model until December 2007 while NCOIL completes its model. Rep. Brian Kennedy, D-R.I., offered a substitute resolution that removed the request for an NAIC delay of action and noted that NCOIL would address the issue in its own model. In a 24-2 vote, NCOIL’s executive committee voted to issue the original resolution.
It was noted during the discussion that legislators needed to look at the issue quickly because some states are starting to introduce bills based on the NAIC model.
McPeak told legislators that the NAIC model will go before the executive committee and plenary at its spring meeting with amendments that reflect questions raised by banking groups that the current draft illegally hamstrings banks from legitimate lending transactions.
McPeak told National Underwriter that language regulating investor-owned life insurance placed in trusts would probably not result in new language in the current draft. The reason, she explained, was that if 2 sets of amendments were put before the executive committee, it could slow adoption of the model. However, she continued, if the draft is sent back to “A” committee, then the issue would be examined. If the model is fully adopted by the NAIC, it would still be possible at a later point to reopen it to look at changes, McPeak noted.
She said regulators were open to the work of legislators. “STOLI [stranger-owned life insurance] is very complicated. It is not easy to legislate intent, and if you come up with something better, then we would certainly look at it.”
Legislators raised issues during the discussion that included intent at the time of sale, property rights, a 2-year versus a 5-year ban on the sale of a contract, lapses and the possible changes to older age issue premium prices going forward.
Rep. Fulton Sheen, R-Mich., said intent at the time of purchase was a difficult thing to ascertain. And, he asked, “isn’t private property and any limit [on it] a constitutional issue? It doesn’t stand a chance in a court of law.”
A “legal penalty” is being placed on policyholders, said Rep. Robert Godshall, R-Pa. He said the 5-year moratorium on sales would penalize legitimate business owners who purchase life insurance for legitimate reasons but do not need it after 2-3 years. They would have to pay premiums for up to 2-3 additional years before they could settle the contract, he added. McPeak responded that regulators were attempting to take away the financial incentive to manufacture a contract just for settlement purposes.
State Sen. Steve Stivers, R-Ohio, asked McPeak whether there would be a market if cash surrender values were higher, to which she responded that there would probably not be a market.
Rep. Robert Damron, D-Ky., spoke of how a restrictive viatical law had killed the option of settlement for Kentucky consumers and how that law needs to be modified to give consumers that option. He also raised the issue of whether consumers would need to look to life settlements if the cash surrender value for insurance contracts was higher.
Industry participants offered their assessment of how to combat STOLI. William Fisher of Mass Mutual, Springfield, Mass., representing the American Council of Life Insurers, said legislators should focus on “what insurable interest is designed to do” and emphasize that life insurance is not designed to “wager in human life.” He offered as an example a situation MassMutual recently experienced. In the last month, a policy purchased 3 years ago with a $3.5 million face amount was settled. MassMutual, according to Fisher, believes it was a STOLI transaction because there were 84 beneficiaries in countries ranging from Colombia and Costa Rica to Germany, Argentina and the United States.
If a company changes its pricing to reflect this growing reality, insurance could become unaffordable for those in the 70-80 age range, he added. “If you raise the cash surrender values, there will be a concomitant increase in premiums.”
Enforcing a 2-year period would be helpful but not a complete answer because it still leaves room for dishonest representations, according to Fisher.
“It is hard to divine people’s intent [at the time of a purchase,]” said George Coleman of Prudential Financial, Newark, N.J., who also represented the ACLI. Consequently, legislators need to take action, he said. Coleman said STOLI contracts did result in rates for Prudential policies increasing at older ages. When companies are more liberal with pricing at older ages, they are being taken advantage of, according to Coleman.
However, Bryan Freeman, president of Habersham Funding, Atlanta, and a vice president of the Life Insurance Settlement Association, Orlando, Fla., said that older age contracts do not tend to lapse and that there has not been much of a change for this age band. “If we [life settlement companies] targeted life insurance contracts at age 30, it would absolutely change,” he added. But that is not the target group for life settlement companies, he explained to legislators.