Meeting here earlier this month, members of the Life Insurance Settlement Association gathered to discuss the challenges facing the industry in the current legislative climate.
At the outset of the meeting, LISA president Ramiro Rencurrell sought to extend an olive branch to groups such as the National Association of Insurance and Financial Advisors, and the Association for Advanced Life Underwriting, both in Falls Church, Va., saying the groups “have more in common than you think” with life settlement companies despite a running battles in statehouses across the country over which model law should be adopted to regulate life settlements. The groups have been on opposite sides of the debate between a model act crafted by the National Association of Insurance Commissioners, Kansas City, Mo., that has been supported by AALU, NAIFA and the American Council of Life Insurers, Washington, and the LISA-supported model from the National Conference of Insurance Legislators, Troy, N.Y. Just two weeks prior to the conference LISA executive director Doug Head made comments in a California publication that the AALU and NAIFA had “lost their way” and were acting in the interests of life carriers rather than consumers by supporting the NAIC model.
Brian Casey, a partner in the Atlanta office of the law firm of Locke, Lord Bissell & Liddell, LLP and member of LISA’s board, noted that the group is in the midst of the “fiercest” legislative season it has experienced, “even more so than during the first incarnation of the NAIC viatical model act.”
Later during the conference, Mr. Head and others discussed the state of some of those battles, which includes some losses as well as victories. Among the more notable losses was West Virginia, where Mr. Head said that LISA was “assured” that a bill would not be put forth, only to have stern legislation passed at the last moment.
The West Virginia law includes “awful” penalties for those involved with stranger originated life insurance, or STOLI, according to Mr. Head, including criminal penalties that could extend to the policyholders themselves as well as the investors.
Other difficult states include North Dakota, which Mr. Head said passed the NAIC model last year but may reconsider when the state legislature meets again in 2009, Iowa and Nebraska, where Mr. Head said that LISA ran into a very influential lobby on behalf of life carriers. “When you have a large and powerful insurance industry it is very fair and reasonable to expect that life companies will get what they want,” he explained.
There were some victories as well, however, including Connecticut and Hawaii, which passed what Mr. Head said was the NCOIL model “in its purest form,” albeit with an expiration date of 2 years.
However, Jack Kelly, a partner at the McPherson Group, LLP in Washington and head of the Institutional Life Markets Association that represents large institutional investors cautioned that all the laws enacted by the states, even those viewed as positive by LISA, should be considered through the prism of life settlement investors and providing certainty to that segment. As an example, he noted the legislation in Indiana, which is viewed as a “win” by LISA but contains, in Mr. Kelly’s view, a potentially open contestability period for carriers to challenge the legitimacy of a policy. “What happens if, in 5 years from now or 7 years from now, an insurance carrier starts to challenge policies?” he asked. What LISA members should be looking for in legislation, he said, are the same provisions that ILMA members are seeking.
While many LISA members bemoan the NAIC-based model as making life settlements difficult in that state, Mr. Kelly said institutional investors see the criminal penalties it includes as a deal breaker.
A number of states have criminal penalties for STOLI, he said, but West Virginia’s also penalizes unintentional acts, which makes investors shy away from the state. “Understand, the institutional markets are going to look at states and say ‘wait a minute, we as institutional markets can’t go into states where there are criminal penalties,’” he said. “It’s too risky.”
While getting the law life settlement brokers and providers prefer put on the books is important, Russell Dorsett, a co-managing director of Select Life Corporation, Northport, N.Y., said that just establishing rules for the industry is an important goal.
“We want regulation,” he said. “If you don’t know where the fence posts are, you can’t stay between them.”
Mr. Rencurrell picked up on that metaphor, explaining that even in getting regulations enacted, life settlement brokers and providers often find themselves seeking to determine what a state legislature intended in passing legislation.
“We worry about ambiguous language,” he said, noting that intent can differ between different states, different lawmakers, and between a legislature that passes a law and the commissioner who enforces it. “Our biggest challenge is reading through the ambiguity and understanding the intent so we can stay between the fence posts and not on them.”
Mr. Kelly disputed that notion, however, arguing that while some providers might see the importance of reading the intent behind a law, those providing capital for the industry are concerned more with the specifics of the legislation. “Legislative intent means very little, it’s what’s between the 4 corners of the paper that matters,” he said, noting that the actual provisions of a law will determine the ability of a carrier to “throw paper” at the secondary market with a long drawn out challenge to life settlements. “This is why a comma in the law, an ‘and’ or an ‘or’ in the law really matters.”
Looking further down the road to the next regulatory battle, Mr. Rencurrell noted the development of “synthetic” life settlements, which allow investors to invest on the performance of a pool of life insurance policies without actually purchasing them, as an issue LISA intends to monitor. “It’s one of those things we like to put on our watch list,” he said.
Although he said that synthetics could be “an ingenious idea,” if regulated properly, Mr. Rencurrell added that he could not tell exactly where such an investment should be regulated given its unique nature as a non-life settlement investment that is based in insurance policies. “I can’t see management or oversight at the [Securities and Exchange Commission,] or at the NAIC,” he said.
Additionally, he expressed concern that some of the insured included in these pools may be having their personal information transmitted to investors without their consent, and that any blame for problems with these products in the future may end up falling on the shoulders of the life settlement industry, even if life settlement companies are not responsible for those problems. “Somehow or another it always falls on the settlement industry,” he said.