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Regulation and Compliance > Federal Regulation

6-Month Life Settlement Outlook: More Growth, More Regulation

By Larry Simon

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The life settlement market will continue to expand and evolve in the second half of 2008.

Since the business emerged in the early 1990s, life settlements have provided eligible senior-aged clients with an effective financial planning tool to help deal with unnecessary life insurance policies. They have also introduced a new way for financial professionals to boost clientele and increase profit. The associated rewards have helped fuel the market’s growth to date, as well as increased attention, interest and scrutiny.

Going forward, expect continued growth, continued attention on regulation of the transactions and more standardization of the secondary market.

Already this year, new mortality tables have been released, impacting the life expectancy underwriting used for evaluation and pricing.

Securitization of the asset class is also expected to occur this year, providing liquidity options for institutional investors and further establishing life settlements as an effective alternative investment option.

Furthermore, expect to see alleviation of issues associated with the subprime crisis, specifically the decrease in available marketplace capital, helping to refuel the industry in the monetary sense.

For financial professionals interested in entering this growing marketplace, and even for those already accustomed to these transactions, understanding the current trends and proposed regulatory changes can help promote success and better preparation for the anticipated industry changes.

Regulatory background. For the rest of the year, much of the regulatory focus is expected to relate to issues dealing with stranger-originated life insurance (STOLI).

STOLI transactions are different from life settlements because they are purposely initiated to benefit someone with no insurable interest in the insured, in violation of the insurable interest doctrine. The outcome of such fraudulent practices has negatively affected both the life settlement and life insurance industries, and confused those working in the marketplace.

In an attempt to clear up the confusion, the National Association of Insurance Commissioners introduced new amendments to its existing Viatical Settlements Model Act in June 2007. These were proposed as a way to combat the practice of purchasing insurance policies only to sell them in the secondary market.

But the proposed changes were met with industry alarm and controversy. Much controversy centered on language that proposed a 5-year ban on certain life settlements in the secondary market. Many financial professionals and industry organizations, including the Life Insurance Settlement Association and the Life Insurance Finance Association, voiced concerns that the amendments have the potential to affect negatively both consumers and the life settlement industry.

The National Conference of Insurance Legislators issued its own version of the Life Settlements Model Act. The NCOIL Model Act proposes a new definition for STOLI and has been more widely accepted by industry professionals, who believe it presents a more clearly defined definition of STOLI and better protection against fraud.

A changing regulatory atmosphere. Since introduction of the NCOIL and NAIC model acts, a number of states have already enacted legislation aiming to regulate the life settlement industry.

This includes 5 bills based on the NAIC model and five based on the NCOIL model. Other states are opting for legislation using a combination of both acts.

Industry professionals have applauded the bills based on NCOIL’s proposed guidelines, and more such legislation will likely be enacted.

Meanwhile, professionals are continuing to speak out against STOLI, and they are calling for states to reevaluate legislation that could present life settlement industry barriers. With the introduction of each new piece of legislation, expect these professionals to continue fighting to strengthen guidelines that help curb STOLI practices.

Getting educated. The industry’s growth plus the increasing attention on the industry will continue bringing issues to light that still need resolution, including regulatory matters. In the area of STOLI, for instance, more new legislation will be introduced. Expect a push for more uniform standards that effectively address STOLI and aim to stop fraud in the marketplace, protecting both consumers and the professionals aiding seniors in financial planning goals.

All this requires continued education. To learn more, professionals should visit industry-focused web sites, including those of NAIC, NCOIL and LISA, and also get involved in industry events, courses, panels and webinars.

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