Less than a year after launching an effort to rework its existing life settlements model act, the National Conference of Insurance Legislators passed a draft that includes a definition of stranger-originated life insurance that both the life insurance and life settlement industries signed off on.
The full NCOIL executive committee unanimously voted on the model during NCOIL’s annual meeting in Las Vegas, earlier this month. The vote followed a unanimous approval by the life insurance and financial planning committee of the organization, based in Troy, N.Y.
State Rep. George Keiser, R-47th District-Bismarck, N.D., who spearheaded the model’s development, said it represents a true compromise because all parties had to make concessions. He also noted that representatives of life insurers, life settlement companies and institutional investors spent between 30-40 hours on conference calls and in all-day sessions to create a model that would address STOLI.
The model’s development is an alternative to an amended Viatical Settlements model act adopted earlier this year by the National Association of Insurance Commissioners, Kansas City, Mo.
A major difference between the two models is the length of time a policyholder is prohibited from settling a policy. The NAIC model has a 5-year moratorium on settlement with certain exceptions for life changing events, while the NCOIL model has a 2-year moratorium reflecting the contestability period traditionally used in life insurance contracts.
Legislators considered it important to get the model adopted at the annual meeting so it could be brought before state legislatures starting in 2008.
Going into the meeting, there were still many points in the 34-page document on which life insurers, life settlement and institutional investor interests had not reached accord. A sometimes contentious 5-hour session was held at the start of the meeting on Nov. 14. The session did not prove sufficient to complete changes to the model, and an additional session was added the following day.
In the interim, a compromise definition of stranger-originated life insurance developed by State Sen. Ralph Hudgens, 47 District, Hull-Ga., brought together the different interests.
The definition identifies STOLI as “a practice or plan to initiate a life insurance policy for the benefit of a third party investor who at the time of policy origination has no insurable interest in the insured.” It goes onto say that “STOLI practices include but are not limited to cases where life insurance is purchased with resources or guarantees from or through a person, or entity, who at the time of policy inception, could not lawfully initiate the policy themselves, and where, at the time of inception, there is an arrangement or agreement, whether verbal or written, to directly or indirectly transfer the ownership of the policy and/or the policy benefits to a third party.”
The definition offered by Hudgens also includes a STOLI transaction done through trust arrangements. The definition reads, “Trusts that are created to give the appearance of insurable interest, and are used to initiate policies for investors, violate insurable interest laws and the prohibition against wagering on life.”
The American Council of Life Insurers, Washington, had emphasized the need for a definition of STOLI in the model. The importance of addressing STOLI on the front end rather than pursuing redress after a transaction had been effectuated was stated by Michael Lovendusky, an ACLI representative.
George Coleman, representing Prudential Financial, Newark, N.J., cautioned that these transactions are very difficult to identify and that insurable interest laws do not identify new varieties of STOLI. Consequently, a definition is very important to stop these transactions, he noted.