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.
Much of the fear of those in the life settlements industry, he said, is based on an unlikely worst-case scenario. In order for state regulators to call in a bond, he said, first “they are going to have to ascertain that you violated” a major rule or regulation in the state. Even in those cases, he said, the general practice is for regulators to notify the individual or company about the violation in a letter, and to instruct them how to correct the problem. Once the violation or the conditions that lead to the violation are fixed, he said, the problem generally goes away.
“The only way a bond gets called is that you do violate state laws and regulations, you do it on purpose, and you don’t fix it,” he said. “States don’t want your money; they want you to operate right.”
Because it’s based on financials, Brown noted that a company could only obtain a limited number of surety bonds, and those bonds will not carry over from state to state.
It remains unclear whether the bond called for by the NAIC would serve as a “blanket” or be required in each state; both LISA and, separately, some agent groups have called for a “blanket” interpretation, and for the NAIC to allow errors and omissions coverage to serve as an alternate guarantee of a company’s financial dependability.
Essentially, Brown said, companies should weigh the potential costs of getting a bond in a particular state versus the amount of business they conduct there. If a company gets a bond to be licensed in a state where there isn’t much business, it may cost them when they seek a license in a more active state.
“Be very specific about the states that require a surety bond” when going about the business of getting licensed, he advised.
Generally, he said, it will take 60 days for a company to underwrite a surety bond, and it may want to look at additional information and even speak with the principals of a company before a bond will be issued.