Investor-originated life insurance poses a danger to the insurance industry and the way Congress looks at life insurance, according to speakers and attendees at a major reinsurance conference.
IOLI, also called “stranger-owned life insurance,” is a topic that came up frequently here at ReFocus 2008, a reinsurance meeting organized by the American Council of Life Insurers, Washington, and the Society of Actuaries, Schaumburg, Ill.
Stuart Reese, chairman of Massachusetts Mutual Life Insurance Company, Springfield, Mass., made the case that using STOLI to pay cash to investors, rather than death benefits to relatives or others with a clear insurable interest in the life of an insured, is a threat to the tax advantages that the life insurance industry now enjoys.
If a consumer buys a policy with protection in mind and later has no need for the policy, the consumer has property rights, and, in that case, “there is a legitimate life settlements business which is consistent with the purpose of insurance,” Reese said.
But, if the consumer buys the policy without ever intending for the benefits to go to someone with an interest in the consumer’s life, “that strikes me as a situation that is not what Congress had in mind when they gave us a tax advantage,” Reese said. “It puts the insurance industry at risk, if Congress says, ‘Wait a minute. This is speculation on life.’ It is a huge risk for the industry.”
In an environment in which Congress is looking for ways to generate tax income, “this is something that we should all be worried about,” Reese said”
Mike Bell, executive vice president with Pacific Life Insurance Company, Newport Beach, Calif., said he supports a regulated life settlement industry but believes it is important not to take in any STOLI business.
“We talk about how bad it is, but we don’t do anything to stop it,” Bell said. “We need to be first in line to say no and mean no.”
Rather than delivering more value to seniors, life settlements will hurt seniors, by increasing the cost of insurance built into contracts, reducing the number of no-lapse products on the market, cutting capacity and making underwriting tougher, Bell said.
National Financial Partners Corp., New York, a financial services distributor, met with carriers to discuss what they thought NFP should and should not sell when STOLI first came on the market, according to NFP Chairman Jessica Bibliowicz. NFP then decided what deals to avoid, she said.
Life settlements make policyholders feel as if they have more options, and they are “an excellent hedge” for the life insurance industry, Bibliowicz said.
But NFP decided to take steps to disclose compensation and to ensure the anonymity of the insureds, Bibliowicz reported.
“Investors don’t need to know someone’s name,” she said.
NFP also has “worked very hard in the scrubbing of non-recourse financing,” Bibliowicz said.
Bell and Bibliowicz agreed that stranger-initiated products are very difficult to detect.
During the ReFocus conference, speakers and participants suggested addressing STOLI concerns by giving contract holders new incentives not to settle, such as new mechanisms for getting cash out of contracts without settling.
A discussion group participant shared an anecdote about an insurer that traced a big increase in life settlements involving insureds ages 71 and older to one specific producer. The insurer dealt with the problem by terminating that producer, the participant said.