The Florida insurance department is considering introducing legislation during the 2009 legislative session that would curtail stranger-originated life insurance.
The state’s legislative session runs from March through May.
Toward that end, an informational hearing was held on Aug. 25 so the department can study the issue, says Mary Beth Senkiewicz, deputy commissioner-life and health with the department. Comment will be received through Sept. 28.
There was a lot of discussion about what STOLI means, says Senkiewicz. In general, it was agreed that it was an illegal attempt to evade an insurable interest law. There also seemed to be agreement, she adds, that legitimate contracts are assets and owners can sell their policies to someone else.
The distinction between stranger-owned and stranger-originated contracts was made, Senkiewicz adds. There is concern about the “manufacturing” of a policy solely for the purpose of a sale to an investor and the use of premium financing as part of that transaction, she says.
Senkiewicz adds that Florida Insurance Commissioner Kevin McCarty wants to examine how trusts are used in STOLI transactions and how models developed by the National Association of Insurance Commissioners, Kansas City, Mo., and the National Conference of Insurance Legislators, Troy, N.Y., could be used in the development of any legislation.
Senkiewicz notes other points that came up during testimony such as the potential impact of STOLI on the price and availability of insurance and the waivers of liability that seniors are often expected to sign that could make them liable for losses incurred by investors.
“The manufacture of life policies for the benefit of investors is a real threat to our franchise,” says Curt Leonard, regional vice president-state relations with the American Council of Life Insurers, Washington.
During the Florida hearing, the different acronyms and what they actually mean were discussed, he says. Insurers do not have a problem with stranger-owned life insurance that is part of the traditional settlement business, he says. But, Leonard continues, insurers do have concern with stranger-originated life insurance where “investors are looking for elderly bodies to recruit.”
Two representatives for the Association for Advanced Life Underwriting, Falls Church, Va., testified about what they are seeing in the field.
STOLI is showing up in mutated and hybrid variations, according to Bob Rubin, an AALU representative who is a producer with Wachovia Insurance Services, Boca Raton, Fla. These hybrid STOLI transactions often require a personal guarantee of 25% of the cost of the contract to be put up, Rubin says.
But Marshall Jones, president of RMJ, Inc., West Palm Beach, Fla., says the understanding is that the life insurance purchaser will never have to make good on that guarantee.
“Any type of premium financing can be made to look like traditional insurance planning,” says Jones.
One sign of STOLI, according to Rubin, is the requirement that a life expectancy report be done up front.
But the problem, according to Tom Korb, AALU vice president of policy and public affairs, in an interview with NU, is proving the intent in buying a contract that is actually a STOLI transaction.
There are transactions that are approved by companies in which it only becomes clear later on that it is a STOLI transaction, according to Jones.
What continues to occur, he adds, are seminars and luncheon meetings that encourage seniors to take advantage of their “unused insurance capacity.”
While Rubin, who is a CLU and ChFC, says that these designations do have ethical requirements for their holders, he says those who actually sell STOLI policies are not concerned with designations or their requirements. During the AALU interview, it was noted that without specific access to documents, agents who reported perceived abuses open themselves up to slander and libel issues.
The impact of STOLI, according to Rubin can be a 3-4 week wait for in-force illustrations to service a contract. Jones adds that since 2003, the cost of UL with secondary guarantees that is often used in STOLI transactions has risen 5-7% and is also less available.
Scott Cipinko, executive director of the Life Insurance Finance Association, Marietta, Ga., who also testified, notes that life insurance premium finance has been in use for decades and predates the life settlement market. “Premium financing should be available. It is a good product, a worthwhile product,” he says.
And Doug Head, executive director of the Life Insurance Settlement Association, Orlando, Fla., says that if legislation is pursued, care needs to be taken to ensure “you are accomplishing what you want to accomplish.” Care also needs to be taken to ensure that “efforts to go after STOLI are not really efforts to go after the settlement business.”
Companies are doing a good job of identifying STOLI transactions, he says. If a producer knows of questionable transaction, that producer should report it, Head says. There is an “ample body of law to go after perpetrators of STOLI,” he adds.
Head says that a template to resolve the issue may be legislation that was adopted by the California legislature on Aug. 29, a law that he says is supported by both life insurers and the life settlement industry. A caveat, he notes, is that unless a budget is presented to Calif. Gov. Arnold Schwarzenegger, the governor has indicated that he would veto a package of legislation that includes the STOLI bill. But even if the legislation was not signed into law this year, he believes it has enough support to be signed into law at a later point.
The ACLI also expressed support for Calif. Sen. Bill 1543.