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Regulation and Compliance > State Regulation

When Settlement Firms Face Market Conduct Examinations

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As life settlements become more a part of the mainstream of the insurance marketplace, those involved in settlements are undergoing the same sorts of procedures as their counterparts in the primary market, including market conduct examinations by state regulators.

Kathleen Birrane, senior vice president and general counsel for Maple Life Financial in Bethesda, Md., noted that “most states regulate the viatical sale for the consumer.” Some states only regulate “true viaticals,” she added, where the seller meets certain criteria such as having a terminal illness or specific life expectancy, while a smaller number regulate all life settlement transactions.

In examining companies’ regulated transactions, she said “they want to make sure all the critical parties are licensed,” which includes the life settlement provider and the life settlement broker, and that all of the state requirements have been met. These, she said, can involve ensuring that the proper forms have been used, the proper disclosures have been made and, for some states, issues regarding compensation.

John McCarroll, vice president and general counsel for Q Capital Strategies in New York, added that examiners will also look at aspects of the business such as escrow procedures to ensure that the viators are promptly paid in the transactions.

Market conduct compliance, Birrane noted, is a part of doing business in the insurance world. Anyone licensed by a state regulator “has to be aware that, at any point, you are subject to having to provide state regulators with information about your participation” in the state’s market.

There are, however, two distinct forms that requirement can take, she noted, as either a full market conduct examination or a less formal inquiry by state regulators. “It could be in response to a consumer complaint, or even just a question” from a regulator, she said.

What makes a full market conduct exam different is that there is a “very specialized process” that states undertake, Birrane said, and it is a “uniform process throughout the states” covered by a handbook produced by the National Association of Insurance Commissioners. That guidebook sets out the rules for examining insurance companies or producers, she explained, and life settlement firms may be included either as “ancillary” companies, or they may be dealt with by the state’s specific life settlement act. “Every state’s a little bit different in terms of how detailed they are.”

While the regulations governing life settlements among states may vary in general, McCarroll said the content of a market conduct examination is “fairly similar in every state.” Many of the issues for conduct, he added, are effectively the same. McCarroll said every regulator will want to ensure that case files are fully documented. “They’re very into case files,” he said. “All that would be consistent in every state,” although he cautioned again that “there could be a particular issue” in which a specific state examiner might be interested.

“In general, compliance issues are pretty consistent across the board,” he said.

The process, however, is fairly straightforward. The state will issue a letter to the company outlining what it wants to look at and for what period of time. The regulators will typically want to look at files for a specific time period, Birrane noted, generally for one year, as well as a sampling of other files to ensure that they are compliant with state rules. Additionally, she said, “they want to make sure you have policies and procedures that show you are complaint with state law” in terms of how data is kept secure and what access employees have to that information.

McCarroll also noted that the specific regulations governing life settlements vary between states and that it “depends on the state” in terms of how and when an examination occurs.

“Every state reserves the right” to examine a company, he said, but actual examinations may not occur in any given year. As an example, he noted that Q Capital Strategies began obtaining licenses 3 years ago and is currently licensed in 23 states with more expected, and has only been subject to one market conduct exam. While again noting that every state reserves the right to conduct an exam, he said that “some states are more proactive.”

He added that the frequency of exams may also be a question of resources. While settlements may be a growing part of the market, McCarroll noted that given the still relatively small portion of the market involved with life settlements, “it isn’t always a priority.”

Additionally, some states, he said, noting Georgia specifically, will conduct their exams on a pre-licensing basis–”they’ll examine you before you even open your door” for business in their state.

Both McCarroll and Birrane spoke at a recent compliance conference hosted by the Life Insurance Settlement Association in Washington D.C., and said the advice they gave there was for companies to be prepared to provide regulators with the information they need before the exam even begins.

In fact, Birrane argued that life settlement providers and brokers should be prepared to have their files examined even before they have files. “Start out by understanding that the day you open your doors to do business, you have to understand every element of every law that affects how you do business” and that companies have to have accounted for every aspect of their operation, she said. A significant portion of that, she added, relates to the records kept by the company, “how you keep records, how long you keep records and who you give access to.”

Additionally, she said companies must be able to provide “evidence” of their compliance through written policies and procedures, as well as records of training undergone by employees that show they know of the procedures and “understand that they can’t deviate from them” unless counsel has looked at the issue and determined it is allowable.

Showing that those procedures are in place, and having files readily available, is important, “so that when you get that call letter, you’re not running around like a chicken with its head cut off,” she said.

“You want to be able to give them what they’re asking for” quickly and easily, she said.

McCarroll said firms should also provide a specific contact for the regulators to work with as the market conduct exam goes forward. “Designate a point person or two,” he said, so that the examiner will have someone who can answer their questions and companies can avoid a scenario in which “you have a regulator going around and asking questions to all your employees.”

Birrane agreed with McCarroll about the need for a point of access or chain of command in working with the examiner, noting that it can also keep the examiner from being overwhelmed. “You don’t want 12 people going in and trying to give them the information at once,” she said.

If there has been an error, she said, the company should disclose it up front and explain what has been done to ensure that the same mistake will not be made again. Examiners, she said, “are not out to get someone” and will be more interested in seeing that the error was noted and corrected, and that procedures are in place to ensure that it does not happen again.

In general, McCarroll said a company facing an examination can make the entire process easier by working to ensure the examiner has the information they want to see as quickly as possible once a call letter is received. “There’ll be follow up before the person comes in,” he said, in which the company can send them all or much of what they requested. Providing this information quickly and thoroughly is important, he noted, because it will set the tone for conduct examination before it even physically begins.

“You want to make sure that they have a positive impression before they walk in the door,” McCarroll said.


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