Podcast Center
Video Center
Webcasts
Resource Center
Events
May 27, 2007 at 04:00 PM
While much has been made over a potential requirement that life settlement brokers and providers obtain a $250,000 surety bond in the proposed update to the National Association of Insurance Commissioners’ viatical model act, one speaker at the Life Insurance Settlement Association’s spring meeting here argued that such bonds are not so great a threat as they have been made out to be.
“Probably the most misunderstood type of financial agreement there is, is a surety bond,” said Gary Brown, vice president of the Hays Agency Group in Minneapolis, who also referred to surety bonds as “the issue of the day.”
Surety bonds, he explained, are “not an insurance contract” but rather a third-party agreement to make an entity–in this case the state–whole if the entity taking out the bond does not fulfill its obligations.
Many of those in the life settlement industry already face some form of bond requirement, he said, noting that the bonds are currently required by “15 to 20 states or so,” and generally for the sum of $100,000.
Typically, he said, sureties issuing the bonds look at a myriad of factors before underwriting a bond, including financial performance, company history and personnel. The problem for the life settlement industry for the most part, Brown said, is that “most life settlement companies are new” and have not built up as significant a financial history and results as a surety company would generally look for. In addition, he said, “sometimes you run into character issues” that can become a problem.
If the surety company is not comfortable with just the financial statements, or “if the financial sheets don’t look good,” Brown said that it could ask for a guarantee of its own, seeking indemnification in the form of a letter of credit, or in some cases, a cash deposit.
Although it is rare, Brown said the surety company may even want the principals of a company to personally indemnify the bond. While this has raised the concern of many in the life settlements field, Brown said he did not believe the idea of putting up one’s own money should be seen as such a threat to the industry, and that in other industries, such as contracting, the practice is actually fairly common.
