Several recommendations that life insurers consider important in the development of a revision of a life settlements model act failed to be approved during a special session at the annual meeting of the National Conference of Insurance Legislators here.
Among the changes recommended to the Life Settlements model act was a definition of stranger-originated life insurance. Twice a motion was made to include a definition of STOLI and both times efforts to have it included in the draft of NCOIL’s model act were unsuccessful.
At press time, the model was still being worked on. Adoption on Nov. 17 was considered a possibility.
Michael Lovendusky, a spokesman for the American Council of Life Insurers, Washington, said ACLI made a concession to a request by NCOIL not to press for a 5-year ban on the settlement of policies. Consequently, he continued, it is important to address STOLI transactions on the front end rather than on the back end and a strong definition of STOLI is needed to accomplish this end. The problem with relying on the Unfair Trade Practices Act is that it deals with fraud after the fact and inclusion of a definition of STOLI would deal with the issue upfront.
The reason that a definition of STOLI is needed is that these transactions are not easy to identify, said George Coleman, representing Prudential, Newark, N.J. Insurable interest laws do not identify new varieties of STOLI, he added.
Coleman said life insurers do not object to legitimate life settlement transactions, but rather to contracts initiated without insurable interest. Many of these contracts are initiated in ways that do not violate insurable interest laws, he continued.
But Michael Friedman, a representative for Coventry, Fort Washington, Pa., countered by saying the definition would carve out everything that a life insurer is capable of offering. He noted, for instance, that corporate-owned life insurance and bank-owned life insurance are investments.
One objection to the definition was language that stated that “there is a plan or expectation 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.”
The use of the word “expectation” was questioned because it was considered too broad and could bring legitimate transactions under the definition of STOLI.