State insurance legislators assert that a life settlements model act they are developing is on track to be adopted at the annual meeting of the National Conference of Insurance Legislators, Troy, N.Y., which runs Nov. 14-18.
As part of their effort to advance and finalize the Life Settlements Model Act so it will be ready for the 2008 legislative season, an all-day work session was held in Chicago on October 25.
Approximately 40 attendees and witnesses including legislators, regulators and life insurance and life settlements executives were present, says Mike Humphreys, NCOIL director of state-federal relations.
A large segment of the meeting was devoted to a discussion of what should be under insurance regulation and what should come under the purview of securities regulators, according to participants. Other topics broached included the issue of preventing the use of trusts to shield stranger-originated life insurance transactions as well as the use of penalties to quell the use of STOLIs.
Representatives from the North American Securities Administrators Association, Washington, offered suggestions to clarify regulatory oversight and NCOIL members reviewed the NASAA markup and deleted language in the NCOIL draft including “life settlement purchase agreement” and “life settlement investment agent.” Also deleted was all of the draft’s Section 14, which deals with false representations and deceptive words, says Humphreys. The reason the section was deleted, he explains, is “because the provisions relate solely to the regulation of the securities side of life settlement transactions.”
However, Humphreys continues, “other suggestions made by NASAA, including deleting references to ‘financing entities, financing transactions and special purpose entities’ were rejected because they are used almost exclusively as carve-outs from certain restrictions” and because there was general agreement among interested parties that “the references needed to remain in the model act because these references are a part of current settlements regulation across the nation.”
Additionally, NCOIL members approved amendments put forth by Rep. Robert Damron, D-Nicholasville, Ky. and Rep. George Keiser, R-Bismarck-N.D. Keiser is chair of the NCOIL subcommittee spearheading the revision of the NCOIL model. The Damron/Keiser proposals strengthen the penalties section of the model and offer language to address the use of STOLI in trusts as well as offer a definition of a fraudulent life settlement act.
Damron says the focus of the model must be to eliminate fraudulent STOLI schemes while ensuring that consumers have access to a life settlement market. A healthy life settlement market, he maintains, is a market solution to ensure that life insurance contracts provide sufficient cash value to consumers. The elimination of STOLI schemes, Damron adds, can be accomplished by putting strong penalties in place for violators.
Damron says stronger underwriting is needed among life insurers and this is already occurring among some carriers. He adds that life insurers have to balance the functions of their sales and underwriting departments, and he believes that in some cases, life insurers have been willing participants in transactions that have resulted in STOLI.
Companies are starting to take steps, he says, that will catch STOLI transactions. These include carriers asking for all trust documents as well as expanding the number of questions asked before a policy is issued.
But, a strong penalties section in the model will curb future STOLI attempts, Damron says. When asked if racketeering laws under RICO could be used, Damron says it is possible, given the scope of some of these transactions and the fact that they are interstate in nature.
There are still “substantial issues” including STOLI such as transparency concerns regarding data and specific recommendations on penalties that NCOIL needs to address, according to John Gerni, regional vice president of state relations with the American Council of Life Insurers, Washington. There is still “a long way to go” if it wants to pass a model at its annual meeting, he says.
Gerni says ACLI still supports a 5-year restriction on the sale of a life contract. The model still needs the reporting of data on all transactions with life settlements companies, he continues.
On the issue of trusts, Gerni says suggested language would include trusts under the definition of life settlements contracts. He says it is a pending issue because companies are waiting to see how New York regulators address regulating trusts in a draft the state is developing.
“The bottom line,” says Gerni, is that as things stand now, “NCOIL has a long way to go before it addresses STOLI.”
ACLI addressed these issues in an Oct. 12 cover letter and suggested changes it sent to NCOIL along with the National Association of Insurance and Financial Advisors and the Association for Advanced Life Underwriting, both in Falls Church, Va.
Suggested changes ranged from what a fraudulent life settlement act includes to suggestions for reporting requirements and privacy to changes in the prohibited practices section.
Doug Head, executive director of the Life Insurance Settlement Association, Orlando, Fla., submitted suggestions to legislators on behalf of LISA, recommending among other things that there be a requirement that the insured consent to the release of medical records if the policy is being sold less than two years rather than three years from the date of issuance of the policy. The reason, according to LISA, is that the two-year period is consistent with the contestable period for life insurance. A three-year contestable period, according to Head’s submission, is a “random period and represents an improper and unnecessary attempt to expand the contestable period for life insurance.”