After 9 months of work, the New York insurance department is ready to introduce its own life settlement bill, says First Deputy Superintendent Kermitt Brooks.
The bill is designed to protect consumer rights as well as privacy and to allow for new market developments such as securitization, says Brooks. The department, he adds, is “agnostic about whether a life settlement market develops” but is intent on ensuring “good protections for consumers.”
Toward that end, he says the department scheduled a series of regular 2-4 hour working sessions in which stakeholders in the legislation went through a draft line by line. The one common point among these interested parties, he says, was a desire to see the market better regulated. In the end, he says, the bill does not resemble either of the models developed by the National Association of Insurance Commissioners or the National Conference of Insurance Legislators.
The New York bill, which will soon be introduced when a sponsor is found for it, has a 2-year ban on the sale of a life insurance policy after its purchase rather than a 5-year provision, Brooks says. The reason for the 2-year ban, he explains, is to try to balance policyholder rights, competitive interests, the need to protect insurable interests and a settler’s privacy.
The bill will better regulate all parties involved when an individual decides to sell a policy, Brooks continues. Life settlement providers that purchase contracts will have to be licensed as will life settlement brokers, he says.
Life settlement intermediaries, those who set up a system to track offers and counteroffers, and settled policy investors, either domestic or foreign, must be registered, Brooks explains. This will help ensure privacy protections for those selling policies because personal information needs to be produced before it can be sold to a provider, he adds. If a policy is sold to a foreign investor, then that party would still need to be registered with the department, according to Brooks.
But if a decision is made to take a group of settled contracts and securitize them, investors who purchase those beneficial interests will not have to be registered because no personal information will be at risk since investors will be looking at investments from a block of policies, Brooks explains.
Another feature of the department bill, Brooks notes, is that it requires disclosure of all settlement offers and compensation, and it goes further to require disclosure of the identity of any person receiving compensation from a provider or broker.
Other disclosures required will include the fact that tax consequences may result from the proceeds of a life settlement and that proceeds may be open to the claims of creditors.
Additionally, Brooks says, all offers to purchase a policy must be disclosed to the party who is planning to settle the contract. “We want to empower the consumer as much as possible,” he adds.
Another important feature of the department bill, Brooks says, is that there is no definition of stranger-originated life insurance, or STOLI. Rather, he continues, “we want to get at the activity that is driving STOLI.” Consequently, he continues, “entities providing premium financing either directly or indirectly are limited to receiving only the amounts required to pay the principal, interest and service charges related to policy premiums paid under the premium finance agreement.”
The bill also includes a definition of a trust, Brooks continues. “If you assign a beneficial interest in trust to a third party, it will trigger the provisions in the statute.”
The department bill will not change the usual obligations of a life insurer associated with issuance of a policy, he says. 1035 exchanges are not affected but if a life company subsidiary purchased a life insurance contract, it would be subject to the new law, he explains. The statute prohibits a life insurer from directing agents not to discuss a life settlement option, he adds.
Of remarks made by a Phoenix Life representative during a Society of Actuaries’ Investment Symposium in New York on March 26, Brooks says he has not had a chance to review the company’s plans for its new subsidiary but adds that the department would be taking “a close look” at points revealed such as settling Phoenix’s own contracts. And, when asked if the department could require additional cash surrender values to Phoenix contract holders who do not settle contracts if settling a contract provided more value, he notes that New York state already has anti-discrimination rules that could conceivably apply to the situation.
If the department bill is made law, it will take effect within 180 days after enactment with the exception of disclosure provisions which will take effect immediately.