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STOLI Bills Start Appearing In The States

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Efforts to control stranger-originated life insurance are starting to surface in various states as witnessed by a recent draft bill introduced in Ohio and one in progress that could be brought to New York Gov. Eliot Spitzer as early as Dec. 14.

To date, the contentious issue of crafting model regulation has been taken up by the National Association of Insurance Commissioners, Kansas City, Mo., and the National Conference of Insurance Legislators, Troy, N.Y.

Industry interviews indicate that New York’s effort picked up steam at a Dec. 5 meeting where the insurance department gathered opinions and recommendations from different industry stakeholders.

Details of the draft have not been released at press time, but sources indicate it includes a 2-year ban on the sale of a life insurance contract as well as a provision that would regulate STOLI sold through the improper use of trusts.

According to industry representatives, the New York draft is based loosely on both the NAIC and NCOIL models, but radically amended. It will not include a definition of STOLI because that can give “operators” a way to circumvent the law, a reason sources say is consistent with regulators not commenting on previous STOLI/IOLI proposals.

Although the introduction of a bill depends on factors such as getting Spitzer’s approval and putting it on the legislative calendar, industry reps say that it could be introduced in early 2008.

In addition, according to interviews, the department wants a privacy provision that would prevent release of the viator’s identity out of concern that “people could be rubbed out.” Big institutional investors had offered to allow such information to be held with a separate third party entity, people who were at the Dec. 5 meeting said. Policy purchasers would have to be registered, sources added.

A bill in the Ohio Assembly, H.B. 404, specifies a 5-year ban if the agreement is entered into prior to the application for or issuance of a policy that is the subject of a viatical settlement contract. There are exceptions for unexpected life events such as death or divorce.

Under provisions in the bill, the viator could enter into a settlement 2 years after the policy’s issuance if the viator uses unencumbered assets, there is full recourse liability, there are no agreements to guarantee to purchase the policy, and neither the insured nor the policy has been evaluated for a settlement.

The provisions track points in the NAIC model.

In both Ohio and New York, the bills contain a provision that would seek to eliminate STOLI through trust arrangements.

The Ohio bill extends the rescission period for a life settlement from the current 15 days under the law to 30 days if a payment has already been made and to 60 days if no payment has been made.

It also requires life settlement brokers to complete 15 hours of continuing education biannually.

Mary Jo Hudson, director of the Ohio insurance department, says the bill is important for two reasons: It protects seniors while protecting and maintaining the insurable interest law in Ohio.

STOLI is recognizable when there is first-dollar, non-recourse premium financing, says Hudson.

The department is aware that such activity is going on, she says. While at present there haven’t been consumer complaints, she says it is anticipated that in a couple of years, consumers will begin facing issues such as unanticipated tax bills, personal credit that is affected and an inability to get additional needed insurance.

The Ohio legislature has not yet released its legislative calendar but there will be two more hearings before and after Christmas in addition to a recent subcommittee hearing held for proponents of the bipartisan measure on Dec. 11, she says.

The American Council of Life Insurers, Washington, supports the Ohio measure. ACLI has not seen the most recent version of the New York draft so it cannot comment, says Steve Brostoff, an ACLI spokesman.

Doug Head, executive director of the Life Insurance Settlement Association, said there has not been a problem with people who settled a policy being put in jeopardy and that information about the viator is needed so that investors can make a decision. The idea of information being held by a third party is unnecessary because protecting viator information could be written into a contract rather than into law, he said.

Requiring that investors be registered is problematic, he says, because logistically, for example, it would be difficult to register European investors in NewYork.

The Ohio bill, according to Head, does not really address the STOLI problem but does add extra requirements such as creating life expectancy providers.

Scott Cipinko, executive director with the Life Insurance Finance Association, Atlanta, said he is “very disappointed” in the Ohio bill, noting its resemblance to the NAIC model and the fact that STOLI is identified as a premium financing transaction.

But using premium finance as a definition does not stop the affluent from purchasing policies without non-recourse financing and then settling them, he says. If potential viators have illiquid assets, it places those contract holders at a disadvantage, Cipinko adds.


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