For much of 2007, the debates over life settlements took place in the committee meetings of the National Association of Insurance Commissioners and the National Conference of Insurance Legislators. Now that debate will move to the states as the legislatures consider the results of the NAIC’s and NCOIL’s process.
With two competing model acts, the life settlement industry has found itself caught between the two groups, says Doug Head, executive director of the Life Insurance Settlement Association.
“Whether we like it or not, the settlement issue has become something of a touchstone,” he says. The situation, as Head sees it, could become a sort of game of political football and, he adds, “we’re the football.”
Head says the NAIC believes its model will be introduced in 15 jurisdictions, a number that is “smaller than I expected.”
Bruce Ferguson, senior vice president of state government relations for the American Council of Life Insurers, also believes the NAIC model will be introduced in “probably 12, and perhaps even 15″ states next year, with the NCOIL model coming up in perhaps half as many. Among the reasons for the greater number of states looking to the NAIC model, he says, is that it was adopted earlier, giving legislators more time to examine the proposal. Additionally, Ferguson notes that many states “have versions of the NAIC model on the books,” and he anticipates those states “going forward in that direction.”
However, Ferguson cautions that “it’s still relatively early,” in the process, and the models could surface in other states. Given that NCOIL is made up of state lawmakers, he says he anticipates “many of the legislators that took part in the drafting of the NCOIL model will try to push for that.”
One significant difference in their viewpoints, however, is that where Head sees the potential for political gamesmanship, Ferguson believes legislators may see an opportunity to work together with regulators. Some jurisdictions, he says, may try to craft “variations” that include provisions of both models.
“We have and continue to support the NAIC model,” Ferguson says, adding that the ACLI believes that model takes a “rifle shot approach” that targets the most common form of stranger-originated life insurance transactions, particularly the NAIC’s 5-year ban on certain transactions. Ferguson adds, however, that the ACLI also sees the value of anti-STOLI provisions in the NCOIL model that “we view as complementary” rather than incompatible. “You could have one bill with both in it,” he says.
Although LISA strongly opposes the 5- year ban, Head says he is open to the idea of working out a compromise, and adds that the New Year may offer similar opportunities for the ACLI and LISA to bridge the gap.
“Communications will improve in the New Year and we will make some forward progress if we try,” he says. “And I’m willing to try.”
Ferguson says ACLI has no objection to working with LISA on the issues where the two agree, but he adds that for the ACLI “whatever emerges has to prohibit STOLI in the broadest terms possible.”
Jack Kelly, director of government relations for the Institutional Life Markets Association, which represents institutional investors in life settlements, says he expects and welcomes the public policy debate and passage of some form of regulation in key states such as New York and Florida. The New York law, which Ferguson notes is a variation of both models, in particular, “will bring a lot of players to the table” from Wall Street, according to Kelly. Another key state, Florida, is in the midst of a “continuing effort” to enhance settlement regulations, Kelly says. The state insurance department recently offered some proposed guidance on disclosures for settlement transactions, which Kelly notes are “almost a mirror image” of a proposal made by ILMA.
In the end, Ferguson says it is “difficult to predict” how the legislative process will play out.
For LISA, Head says the ultimate goal is to ensure that a reasonable regulatory regime is in place. “In the absence” of that, he adds, “the outliers will continue to misbehave.”
While the two model acts work their way through the states, the NAIC may also work on a provision that could allow life insurers to better compete with the secondary market by allowing insurers to offer policy loans that exceed the cash value of a policy. Ferguson notes that the NAIC’s Life Committee has been charged with looking at the concept in 2008, although the details remain to be worked out. “We’ll have to get a better sense from the regulators,” he says, “but I can see that issue being debated throughout 2008.”
While the regulatory process plays out, the life settlements business will continue. Kelly says he believes the institutional market will continue to look at life settlements and that he expects “nothing but growth” from the sector. As an example, he noted that Goldman Sachs recently established what Kelly calls a “swap index” for life settlement portfolios for the first time. “It shows that they anticipate growth within this space,” he says, adding that in 2008 “we will see others” establishing indexes of their own.
Head also said he sees the industry continuing to grow. “There’s still an awful lot of capital going to policies.”