Many recurring themes surfaced at the Life Insurance Settlement Association’s spring conference here, as the rapidly growing industry continues to work to shape the regulatory world in which it will have to live.
“We will continue to grow as an industry,” said Ramiro Rencurrell, president of LISA’s board of directors. He noted that “supply has continued to grow” for the life settlements markets, both in the number of policies being placed in the secondary market as well as in the amount of capital available to purchase policies. LISA, he added, has grown considerably as well. While the group, which is comprised of brokers, life settlement providers and services firms, had only 30 members at its 2002 meeting, Rencurrell said it has since grown to 150, with more expected.
Another development demonstrating the growth of the industry was the recent formation of the Institutional Life Markets Association, a group of major institutional investors seeking to make their positions known within the industry. Phillippe Hastadt, a senior managing director with Bear Stearns & Co., said ILMA would work to ensure that regulation of the life settlements market is fair and transparent. One of the first goals along these lines, he said, is to promote “efficient and ethical conduct” from those operating within the market. As part of that effort, he said, ILMA is developing a uniform disclosure form for life settlement brokers that would disclose all bids for a policy as well as the compensation the broker receives.
Despite the growth of life settlements, or perhaps because of it, the industry has at times butted heads with state regulators and the National Association of Insurance Commissioners, which is currently considering an updated version of its model viatical act that LISA strongly opposes.
LISA representatives have argued that while the NAIC model is ostensibly designed to root out stranger-originated life insurance, or policies obtained solely for the purposes of being sold, it paints with too broad a brush and would have significantly negative consequences for legitimate life settlement transactions and place unfair burdens on those operating in the secondary market. The measure would require increased disclosures by agents and brokers conducting life settlements that are not required of those initially selling the life policy, and would effectively ban the sale of premium financed policies for 5 years after they were initially purchased.
Much of the problem, speakers argued, is that regulators lack knowledge of how the life settlement market works and what a transaction should look like. LISA Executive Director Doug Head offered a current version of a model standard transaction that LISA members could use when speaking with regulators that would allow the whole association to have a common starting point in dealing with the states. “We would like everybody to start using a common model,” he said.
Scott Cipinko, executive director of the Life Insurance Finance Association, said the problem is even more pronounced when transactions involve premium-financed policies. In his experience at the negotiating table, Cipinko said, he often found that not only regulators but also those supposedly representing producers were largely in the dark on the issue.
“Life insurance producers understand premium financing,” he said. “Life insurance trade association representatives don’t understand premium finance. The trade associations don’t understand what premium finance lenders do, and they don’t understand what you do.”
An oft-spoken theme to solve the problem was for the life settlements industry to “educate” regulators and other public policy makers.
“The number one solution” to the problems with regulators “is education,” said Brian Staples, a former Life Division director at the Kentucky Department of Insurance who is now working with LISA. “While it’s easy to blame the regulators and public policy makers” for not understanding how the life settlement industry works or how it would be affected by regulations.
Some of the problem, he said later, is that regulators base their views not on the life settlement market of today, but on its antecedents. “Many times their knowledge is coming from the past,” he said. “The past haunts us.”
Staples advised LISA members to “develop a relationship” with their home state regulators. Such relationships should not come with any expectation of special treatment for the life settlement industry, he said, but should be pursued in the hope that a regulator would feel comfortable enough with that LISA member to call them with questions instead of relying on the opinions of others.
In his opening address, Rencurrell reminded LISA members that “everyone’s job” should involve education. “It’s not just LISA’s job,” he added. “It’s not just the board’s job.”
LISA appears to have had some success on the education front with at least one regulator, Georgia Insurance Commissioner John Oxendine. In a keynote address at the meeting, Oxendine offered some views very much in line with what LISA believes.
“I believe that a life insurance policy is a property right,” he said, adding that states should only infringe upon that right “when there’s a compelling need to protect the public.”
Oxendine said, however, that he was “really torn” over the NAIC model and that he could not say how he would vote on it. “I’ve got a lot of reservations” about the model act, he added.
Further complicating matters, he said, are new NAIC rules that require a regulator who votes in favor of a model act to support it in their home state legislature. Oxendine acknowledged he had voted for some previous model acts as favors to other commissioners and with no intent of pressing for them in the Georgia legislature. While again noting that he remains undecided, he did say of the viatical model act, “I can assure you that it will not be part of my legislative package next January.”
However, even as LISA has been forming a positive relationship with Oxendine, the lack of a united effort may cost the industry as a whole.
Without mentioning specific names, Oxendine said that “one company lobbied over-aggressively and disparaged a certain commissioner.” He added that he was upset by this attack, and suggested that the negative image of the life settlement industry it created could swing the votes of other commissioners. “A lot of people will vote for the model act because they’re irritated at that one company,” he said.
Oxendine also expressed skepticism about one of the arguments often made in favor of the stricter regulation of life settlements in the NAIC model, namely that they create an image of life insurance as a financial commodity and increase the likelihood that Congress and the Internal Revenue Service will re-consider the favorable tax treatment of benefits and tax the inside buildup of a policy.
Effectively, Oxendine said, he does not believe the IRS will factor the actions of state regulators in its decisions.
“I’m not sure anything that we do will affect what the IRS does,” he said.
Cipinko said later that the inside buildup issue was a “red herring” and that, ironically, federal policymakers likely had not considered the idea of taxing inside buildup until the life industry started trying to stop them from doing so.
“The only reason they would look at inside buildup is because the life industry brought it up,” he said.
One area of federal regulation that is already creeping into the life settlement market is in the area of securities. Securities regulators, specifically the National Association of Securities Dealers, “continue to play a growing role in our industry,” Head noted.
The NASD issued a notice to members last August outlining its position that settlements of variable life policies fall under the rules governing securities transactions.
Additionally, said Eric Marhoun, of the law firm of Lord, Bissell & Brook LLP in Atlanta, the NASD issued an “investor alert” in February warning seniors about the potential pitfalls of the life settlements market, and is also encouraging states to look into sales practices from their end.
Michael Brennan, the chief compliance officer with Woodbury Financial Services Inc., said one of the concerns should be any retroactive application of NASD rules that would require a broker to be registered for certain transactions, and he advised brokers to register with the NASD “just to be on the safe side.”