The second roundtable of life settlement executives sponsored by National Underwriter Life & Health took place on March 23. This was after the spring meeting of the National Association of Insurance Commissioners, when an amended version of the Viatical Settlement Model Act was put on hold, but before an April 2 conference call of the NAIC Life & Annuities ‘A’ Committee, which voted to approve a model draft with additional amendments.
Doug Head, executive director of the Life Insurance Settlement Association, and Steve Piontek, editor-in-chief of National Underwriter, were co-moderators.
STEVE PIONTEK: Good afternoon. Since the last roundtable in October a lot of things have happened in the business. So I think probably the best way to start the discussion would be to maybe go over what is on top of everyone’s mind from the last month or so. Maybe we should start with what happened at the NAIC?
BRYAN FREEMAN: Why don’t we start in NAIC in December and come forward, because in the last three and a half or so months a lot has happened.
It was very interesting what happened there. And in the words of multiple regulators afterwards, they had never seen so much anger in one room in their history of coming to NAIC meetings. Because, I think, in the words of many other people, and I’m included in that, basically we saw something happen where a whole lot of bad things were sort of slammed down our throat and the attitude in the room reflected that.
DOUG HEAD: Do you have a sense that that process was full and open and got to the issues or no?
BRYAN FREEMAN: It wasn’t open at all in my opinion. I was around in the days when we worked through the viatical settlement working group and actually came up with a consensus product where all views were aired. In this case that was not what happened. As matter of fact, unfortunately, many times when people tried to express their opinions, they were told they weren’t to give their full testimony and to make it an abbreviated version and hit the highlights. So with that kind of response, it’s hard to air the issues.
DOUG HEAD: Steve, are you aware of new elements that were introduced to the NAIC process late?
STEVE WASHINGTON: There were actually a lot of changes that were introduced in the draft, although this was heatedly denied and as a result we never got an opportunity to comment on those changes in a meaningful way.
ROB HAYNIE: And look at the sponsorship of those amendments. NAILBA, AALU, NAIFA and those other groups that had no input, no dialogue. I mean, in conversations we had at the International Forum in January, every producer to a man was unaware of any of [the changes from the December NAIC meeting.]
It was brand-new information to them, yet the associations were on the record as in full support of everything, everything without question, of all the amendments.
MICHAEL COBEN: The leadership of those associations took the liberty to take action without seeking the response of their constituents. That’s the issue. So the constituents are being led by people that choose to make decisions on their behalf.
DOUG HEAD: Wouldn’t the leadership be able to argue that that is their role, that they ought to be making those decisions?
MICHAEL COBEN: I think they have the responsibility to communicate to their constituents.
CRAIG SEITEL: They have to present to their constituents what the subject matter is and let them arrive at the conclusion that is best suited for them.
BRYAN FREEMAN: In an open and unbiased way. I mean, if you present something in a very biased way, without the full facts I can see how the constituents may buy into it, but when they really know what it means and you have real dialogue, I found that agents don’t buy into it. As a matter of fact, when they really find out what it means, you have things like what happened in Georgia where NAIFA-Georgia came out against it.
Then they begin to have a balanced point of view about this. And, furthermore, how can an agents’ group advocate that their producer must have a $250,000 bond in every state to do settlements? How does that represent your constituents? I can’t rationalize that in my mind.
DOUG HEAD: There was never really a definition of the problem that we were trying to get. Are we properly defining the problem? And has the NAIC identified the problem clearly or is it still kind of fuzzy?
SEAN MICHAELS: Well, there is no doubt that we need to take steps as a group to help define the problem, because if you read this STOLI Alert and you look at the three groups that stand behind it, publishing it, the AALU, ACLI and NAIFA, there is a lot of incorrect information in there. And you have to ask yourselves how much of it is a mistake or is there something political going on, which either amounts to negligently failing to report the facts or intentionally deceiving people.
I think it’s very important that both LISA and LIFA came out with their rebuttal to the STOLI Alert, just to help people out there in the general public understand what the true facts are. Because I personally have a problem when I see a group like NAIFA put their logo on something like this and these aren’t even the facts. How in the world are they supposed to represent their membership?
RAMIRO RENCURRELL: Investor-originated life insurance, that’s the problem; not stranger-owned life insurance. As I said in the last roundtable, all secondary markets are stranger-owned life insurance. It’s the investor-originated that’s the problem, and even with that they are confused.
DOUG HEAD: Can we define STOLI clearly? What is that?
STEVE WASHINGTON: Probably a bunch of things that we didn’t get into at NAIC. Up front inducement offered by investors and policy applicants, guaranteed payments to the owners, loan term, so they have no choice at the end of the loan to relinquish the policy to satisfy the loan.
CRAIG SEITEL: What we really need to define is what those result in and that is, it compromises insurable interest.
RAMIRO RENCURRELL: It is life insurance issued for the sole intent to be settled.
MICHAEL COBEN: I think the common thread of all those concerns are that you are basically saying it’s a settlement from inception and that breaks all the current regulations and laws that we embrace on a state level. So I think that’s a defining core.
CRAIG SEITEL: Right. And the challenge is how do you determine that? That’s not an easy challenge. It’s not an easy thing to define. It’s up to us to give guidance to NAIC and the legislature.
ROB HAYNIE: Let’s see if I can bring clarity to this. What they have done is they have taken all the elements that we just exposed and what they are trying to define and thrown it into one lump sum, thrown the baby out with the bathwater. A way to kill it all. It’s the only thing they have. Because if you can tell the story and manipulate the facts, like they have done in the STOLI Alert, they can get people thinking in a different direction, other than the way that they should be thinking, which is the truth, so that’s what they’ve done.
It’s up to us as an association to define what it is they are trying to define and make it easier for them to get rid of what it is they are trying to get rid of, but not get rid of everything.
RAMIRO RENCURRELL: Rob, I would like to add to that. As an association, we have always thought that this cannot be resolved in settlement law.
This has to be taken back and resolved in the underwriting departments of the life insurance carriers and the definitions and regulations that govern insurable interest and we have said it more than one time. We are more than willing to work with the ACLI and all of the other associations and NAIC and NCOIL, which have instructed us to work on this together with the ACLI, to fix this problem and to help them, but the problem is not going to be fixed in settlement law.
DOUG HEAD: So the proposal now on the table, at the NAIC, how does it address the problem? Does it?
RAMIRO RENCURRELL: It walks around it and targets the settlement market, the secondary market for life insurance.
STEVE PIONTEK: There are many models passed by the NAIC that are not implemented by the states. The real battle is in the state legislatures.
ROB HAYNIE: Let’s think about our industry as a whole. We are now a State of Florida licensed producer. As a licensed producer I have to disclose to the settler, all the options that are inferior that they can take advantage of other than a million six. They can surrender for 600. They can take a loan. They can exchange. Yet, when that same person goes to do any one of those inferior options it is not incumbent upon anybody to introduce them to the fact that there is a life settlement market–the superior option. So right there we have been picked on and we continue to be picked on.
MICHAEL COBEN: The industry is so fixated on disclosure. What would be interesting to say is that if they really are interested in disclosure, to put another box saying the average secondary fair market value of this policy is X and I’m aware of it.
DOUG HEAD: Is that something that can be addressed in settlement law or does it need to be addressed in another area of the law or does it need to be addressed like insurance company practice?
BRYAN FREEMAN: This may be one of those places where it’s addressed in unfair trade practice.
ROBERT FINFER: I would like to add something. As a broker sitting on the desk, I’m sure Rob, you get this too, when something is issued like this STOLI Alert, our phone rings excessively by all the agents and essentially what something like this does is it’s designed to create fear in the agent, especially the agents that are specifically involved, senior agents with 25, 30 years plus careers, who are best in the position to assist these clients. And it sets us back tremendously with these agents for a time until they eventually, hopefully, come back around and realize how important our industry is to their senior clients.
BRYAN FREEMAN: One thing I think is important, and I know that everybody here shares this thought, is that I love the insurance companies. I don’t want to do anything that hurts them in any way. As a matter of fact, I believe our product enhances their product and that indeed it gives the public another reason to buy a product they, frankly, might not buy without knowing about the settlement option.
MICHAEL COBEN: There is no doubt, when we educate advisors on this option, and now it’s being used as a traditional planning option, that clients now realize that this is a real value to life insurance and it enhances the overall value of insurance in general. And they’ll buy more insurance because of the greater understanding of it.
DOUG HEAD: One of the ideas that emerged, and if I can flash forward to the NCOIL hearing in Savannah, is wouldn’t it be possible for insurers to write two kinds of policies, one that could be exchanged on the secondary market and one that was not exchangeable on the secondary market and cannot be sold and to price them accordingly. Does that idea have any sense to it or is that just?
MICHAEL COBEN: It’s almost akin to convertible and nonconvertible term insurance, which they are able to write.
ROBERT FINFER: Doug, I will steal from your presentation at the last LISA conference. I think you said it best when you said that the insurance company had the best position to create this market and run this market, yet they don’t have any strong desire to do so.
DOUG HEAD: Are there options in terms of insurance company practice here to address this? We’ve seen a lot of earnings calls, where the insurers have talked about their efforts to address STOLI. This is an entirely different place to find information outside of the regulatory arena. The earnings calls are fascinating.
MICHAEL COBEN: I think it comes down to two issues. One is are they really concerned about the protection of the basic principles of insurable interest and property rights or are they really looking at bottom line performance?
I think you have two things going on simultaneously. They are pushing away from really saying the issue for them is bottom line performance more so than the preservation of the insurable interest. They are in a difficult spot. We have already seen responses from carriers who raised costs of insurance at certain ages, eliminating the ability to issue policies at certain ages. So they do have a way of self-policing the earning or risk issue on their part, but that has a positive or negative impact on their line of business and they have to adjust it.
LARRY SIMON: At the end of ’05 we saw the carriers say no more premium finance and they were very effective just on their own. Now, of course, you know, creative people came up with new ways to get around it, but the insurance carriers know what’s going on and they choose not to come down on it for various reasons.
CRAIG SEITEL: Well, many of the carriers that originally got out of the market are now back in.
LARRY SIMON: Of course. But they are not admitting it.
CRAIG SEITEL: And it’s because of earnings.
LARRY SIMON: Of course.
BRYAN FREEMAN: Earnings and executive compensation based on premium production. The interesting thing about insurers is that they don’t agree among themselves, but you have a subset of companies who have decided this is the way it’s going to be, saying we are the white hats and if you guys speak up you will be the black hats. So all the people that won’t speak up are doing business anyway.
And as one of the life insurance representatives at NCOIL conference told me, ‘we need a law because we can’t police our own company. So we need to tell our companies what they can and can’t do.’ And when I asked him, ‘why can’t you deal with it among your own people?’ He said ‘we can’t.’
SEAN MICHAELS I hear agents and financial advisors all the time saying premium financing doesn’t exist anymore when they ask us those questions right on the application about intent to sell a policy right away. People answer them honestly. And when you look at the earnings calls and see the dramatic drop in business, it looks like the carriers are doing a great job policing this themselves.
And from my perspective, not only as an attorney but as an agent, these are usually high net worth seniors that are involved in these transactions. High net worth seniors don’t need to be committing fraud on life insurance applications. They don’t and they won’t. I think the carriers have gotten some good results out of the business decisions that they’ve made to stop this business.
When I see what the NAIC is putting on the table, concurrently with what the carrier is already doing, I wonder who is protecting the consumer? Where is the senior going to get protection of their fundamental property rights, their ability to use financing, if it works with their estate planning? And to really get all of the information that’s available, so they can make a good decision?
I don’t really feel that the NAIC model is pro-consumer with respect to the actual seniors who are buying this insurance.
MICHAEL COBEN: I think part of the problem, as related to premium finance, is that the carriers were getting inundated with all types of programs. And they couldn’t ascertain the difference between one versus another. So rather than spending the time and energy and money to differentiate one program from another, they masked it with the legislation. So if you go back and put pressure on the carriers to do a little more self-policing and to be aware of the market, and spend the time doing that and then I think a lot of the problems will be resolved.
BRYAN FREEMAN: There are two other issues that came up at NAIC, that I think are worthy of talking about and one is when asked about disclosure of the settlement option, as we were speaking of a few minutes ago, instead of saying yes, consumers need to know all their options, we were told that we are not in the business of advertising the settlement business. Well, then maybe we shouldn’t be in the business of disclosing to consumers that they can take a loan or withdrawal. It absolutely makes no sense to me.
DOUG HEAD: Except that the argument is that the disclosure doesn’t belong in settlement law. That it belongs somewhere else in the law. Where might that be?
BRYAN FREEMAN: Maybe it ought to be in insurance policy forms law where they have to disclose it. The other thing that was very interesting to me is when asked about stealth programs we are told those are okay. You can hide it. The chairman of the A committee said you need to follow the law and we are not going to do anything about the stealth program.
DOUG HEAD: What’s a stealth program?
MICHAEL COBEN: A stealth program would be investor-initiated program that is done under the cloak of the trust and the individual has the right to sell the beneficial interest within the trust. It’s very hard for a carrier to understand it, because they are looking at a basic trust, which is a common estate planning tool. Unless they dig into the trust and look at the subtrust and have another subtrust then look at the articles that allow for the sale of the beneficial interest, it’s very difficult to ascertain.
DOUG HEAD: That problem is not addressed at all in the NAIC?
SEAN MICHAELS: It is heavily addressed on a business side by the insurance companies. It’s very common these days for insurance companies to ask for every single page of the trust agreement. It didn’t used to be that way a couple of years ago.
RAMIRO RENCURRELL: Can you not sell the interest in the trust without ever going back to the insurance company? That’s the case and that’s what we are saying as following out of the NAIC proposal.
LARRY SIMON: Right now the insurance carrier sends a questionnaire: Is the policy going to be sold? No. Is it going to be premium financed? No. Well, it may not be premium financed. It goes into the trust and as soon as the trust owns it the trust is sold or the beneficial interest is sold. So you didn’t lie in the application. I wouldn’t want to be against a good prosecutor on the other side of that, but that’s what’s happening.
So if we can extend contestability in all the states for two years and somehow control the trust transfer, then a lot of this stuff goes away.
BRYAN FREEMAN: So those of us who do things above board in the light of day get penalized while those who decide to hide it get a pass and actually hear what they are told in open forum with 600 people in the room, to go ahead.
ROBERT FINFER: I think one of the problems that we face is we have done such a wonderful job of educating agents and carriers about the life insurance settlement business that they found a new way to come back against this business with the life insurance finance products. I think we need to center our time and attention on our product, the life insurance settlement product, which is a great product and most consumer friendly product that we have available for consumers.
ROB HAYNIE: Going back to earlier points of disclosure. As a life settlement company, we are required to disclose a proposal for compensation. We are required to disclose all the offers, counteroffers, etc., and all, as I mentioned earlier, all the inferior options. Someone with the same license that I hold selling life insurance does not have to disclose his or her alternatives, only has to disclose the one offer that he or she feels that they need to tell their client. Usually that’s the one with the highest commission and no disclosure whatsoever of any of the superior options that exist. Yet we are both regulated by the Department of Insurance. Same people. That’s getting back to the point about our product. We are allowing the same people to govern us and them under separate rules, when we have a better option for the consumer. And we are not allowed to do it and they are actually forbidden to do it. In some cases we’ve seen the field notices. You mention the word life settlement, you are fired.
BRYAN FREEMAN: Well, another thing that’s interesting about the policies as an insurance agent is, given the fact that 40% of our policies lapse within 5 years, there are obviously a lot of agents selling policies to a lot of people who don’t need or want the policy. So suitability is probably an issue, along with commission disclosure and other items on the primary market.
And I think if agents are aware regarding commission disclosure, and I’m not saying I’m against commission disclosure, I’m just saying if agents are aware that they are going to have to disclose commissions on settlements, how long do they think it will be before they have to disclose commission on life sales? And 125, 130 percent on first-year commission on life insurance sure beats the daylights out of the kind of commission you get.
RAMIRO RENCURRELL: I don’t see the difference between a primary market and a secondary market disclosure. It should be the same.
STEVE WASHINGTON: I wanted to get back to what is in the Act which will harm life settlements, which is a number of provisions, you know, just on basics. Everything got thrown into 5 years. They also threw in a definition of premium financing within that 5. For traditional life settlements, supposedly they are okay after 2 years, but what they have got is several conditions which didn’t exist before. One of which, for example, is if there had been a life expectancy delivered for that person, then they are thrown into the 5 years, which doesn’t make any sense whatsoever.
There are also disclosures that have to be made to carriers, and it says you have to fully disclose any plans or transactions–here is a transaction to which a settlement provider as a party. And that is really just–will permit the carriers to have a fishing expedition on every transaction.