Members of the National Conference of Insurance Legislators are still trying to add a definition of “stranger-owned life insurance” to a life settlements model act update.

State lawmakers here for the annual meeting of NCOIL, Troy, N.Y., rejected two STOLI definition motions during a special model act session.

But meeting participants who requested anonymity said NCOIL members are continuing to work on a STOLI definition.

In a STOLI arrangement, an investor with no insurable interest in the life of a consumer helps the consumer get life insurance, to create a policy that can be sold through a life settlement transaction.

Life settlement companies have accepted efforts to fight STOLI by including a life settlements model act provision that would restrict policyholders’ ability to sell their policies for 2 years.

The American Council of Life Insurers, Washington, has been pushing for a 5-year restriction on resales.

The ACLI has tried to help NCOIL by agreeing not to press for a 5-year restriction, but shortening the restriction period would increase the importance of defining STOLI in a way that could help life insurers filter out STOLI arrangements before policies are issued, according to Michael Lovendusky, an ACLI representative.

Today, insurers often have a hard time stopping STOLI transactions, in part because initiators of many of the policies are complying with current state insurable interest laws, according to George Coleman, who was representing Prudential Financial Inc., Newark, N.J.

Some say insurers could use the fraud provisions of the Unfair Trade Practices Act to respond to organizers of STOLI arrangements.

The ACLI believes that relying on the Unfair Trade Practices Act is a poor substitute for establishing a strong STOLI definition, Lovendusky says.

An insurer could act on an Unfair Trade Practices Act fraud complaint only after fraud had occurred, but it could use a strong STOLI definition to keep fraud from happening in the first place, Lovendusky says.

Lawmakers, insurers and life settlement companies are weighing every word of proposed STOLI definition provisions

One proposed STOLI definition describes STOLI as an arrangement in which “there is a plan or expectation that that the legal or beneficial ownership of the policy and/or the policy benefits will directly or indirectly accrue to a third party who lacks an insurable interest.”

Critics of the proposed definition said use of the word “expectation” makes the definition too broad and could end up affecting legitimate transactions.

State Rep. Robert Damron, D-Jessamine, Ky., has suggested appending a drafting note to the life settlements model update rather than including a STOLI definition.

A drafting note could talk about the role of trusts in STOLI arrangements and the importance of amending state insurable interest laws to protect against STOLI, Damron says.

Many special session participants argued that a model STOLI definition provision would carry much more weight than a drafting note would.

NCOIL members have agreed to add a life settlement reporting act provision to the life settlement model.

The provision, supported by the ACLI, would require a life settlement provider to file an annual statement reporting on the firm’s life settlement transaction revenue and the total amount of death benefits involved in the transactions.

The provision also would require life settlement providers to describe the ages of the policies settled.

Life settlement company representative said the provision would not help regulators keep track of STOLI, but life industry representatives said regulators need life settlement industry data.

A motion to add the reporting provision to the life settlement model update failed on the first vote, but passed on a second vote.

Supporters won passage of the provision by negotiating a compromise. Under the compromise, life settlement providers would have to supply data on policies sold within 5 years after the policies were issued.