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Regulation and Compliance > Federal Regulation

Changing Life Settlement Roles Can Lead To Overlooked Regulations

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The life settlements industry is not new but it is still young and evolving. As such, its regulation is not uniform from state to state. The natural evolution of the industry has led to the introduction of new lines of business within the industry and changing roles for industry participants that regulators and, in fact, participants in the industry could not have foreseen.

In any evolving industry, established roles will change and new business service opportunities will arise.

This poses a challenge for regulators and industry participants alike. Regulators must ensure that their intended consumer protections and regulation of the industry encompass all facets of the industry. And industry participants whose roles have changed or merely emerged since the introduction of regulation must be especially vigilant in researching industry regulation.

Too often those in new or changed roles gloss over regulation based largely on their previous understanding developed in their former roles. This tendency, while common in evolving industries, results in overlooked regulation and, by default, non-compliance.

Lack of compliance, resulting from poor compliance research or flawed understanding of the regulation is still a violation of regulatory requirements which may be punishable by fines, penalties and suspension or even revocation of licenses.

Consider, for example, the evolving role of funders or ‘Financing Entities’ in the industry. In the early years of the industry these entities provided funds to licensed settlement providers under financing agreements that specified the types of policy purchases the financing entity was willing to fund and the cost of such funding. Following various incidents in the financial markets, these financing entities felt compelled to control more of the transactions they were funding. It is their own due diligence. However, in expanding their control over the transaction in which the insurance policy is purchased, they expand their role in the settlement and reach beyond the National Association of Insurance Commissioners’ Viatical Settlements Model Act’s definition of a financing entity which has been widely adopted by the states:

“Financing entity” means an underwriter, placement agent, lender, purchaser of securities, purchaser of a policy or certificate from a viatical settlement provider, credit enhancer, or any entity that has a direct ownership in a policy or certificate that is the subject of a viatical settlement contract, but:

a. Whose principal activity related to the transaction is providing funds to effect the viatical settlement or purchase of one or more viaticated policies; and

b. Who has an agreement in writing with one or more licensed viatical settlement providers to finance the acquisition of viatical settlement contracts.”

Today’s financing entities may dictate the contract forms utilized (their own), that they handle all tracking and monitoring of insureds under contracts they have purchased, what entity will serve as escrow agent and other activities previously within the definition of ‘Viatical Settlement Provider.”

(Note: The terms ‘viatical settlement’ and ‘life settlement’ are used interchangeably in this article. While the majority of the industry is focused on ‘life settlements’ (insureds who are not terminally or catastrophically ill) the majority of existing regulation uses the older term ‘viatical settlement’ to encompass both types of settlement transactions.)

With this transition come two compliance problems. First, the financing entity may be engaging in activities that cause it to meet the definition of a viatical settlement provider (or certainly blur the distinction between financing entity and settlement provider) but it is acting without having secured licensure as such in regulated states. Second, the provider companies are in the position of fulfilling settlement activities that more closely resemble those of a settlement broker–again without being licensed as such. Both entities are at great risk for regulatory action.

In all but one state regulating viatical or life settlements, all forms presented to a viator, and/or requiring a viator’s signature, must be filed and approved by the state insurance department. Financing entities, believing that they are not settlement providers, often overlook this requirement, believing that it does not apply to them. Likewise, a settlement provider may receive purchase authority for a case from more than one financing entity, but only communicates one offer to the settlement broker. Many states require settlement brokers to disclose all offers received on a case.

In a number of states, tracking and monitoring of insureds whose policies are the subject of a settlement is considered ‘the business of viatical settlements.’ An individual or business entity must be a licensee under the regulations in those states, to engage in ‘the business of viatical settlements.’ In some states, the responsibility for tracking and monitoring, and thereby complying with restrictions on contact with the insured, remain with the settlement provider who effectuated the settlement by statute or regulation.

Without strict controls in place, a settlement provider who allows the financing entity to assume this activity risks violation of the regulation and the resulting fines or penalties. The financing entity also risks fines or penalties and may face strong opposition to securing licensure after the fact.

Likewise, new servicing vendors or existing vendors offering new services may be crossing regulatory lines due to lack of thorough research. Consider the vendors of life expectancy evaluations who offer tracking and monitoring services. Some states have begun to require life expectancy vendors to register with the department of insurance; however, services as a tracking and monitoring agent are not included in this registration, leaving regulation of those activities overlooked by both the regulatory agency and the industry participant.

The shifting of roles between known industry participants and the development of new service providers proves problematic for regulators as well. When the settlement provider is acting more like a broker sending a prospective case to be reviewed by multiple financing entities for bids, who is responsible for required consumer disclosures? When financing entities take on the activities of a settlement provider, how is a regulator to know since financing entities are not required to even register with the state insurance departments? If the providers are serving more as a higher level broker and their contracts are structured to transfer ownership directly to the financing entity, are consumer protection goals met by calling for financial responsibility requirements from the provider but not the financing entity?

The proliferation of financing entities has also led to an increase in the sale of portfolios of settled policies, often between financing entities. Not all financing entities or providers are thoroughly researching industry regulations for impact on the sale of previously viaticated policies. Some view the regulatory scheme solely as protection for the initial viator and insured and, since the initial transaction is completed, feel that the regulations do not encompass the resale of policies. By failing to fully research the regulation, these entities overlook regulatory limits on future policy transfers and that regulation of such transfers varies by state.

For example New York statute Section 7808 states in part “…a Viatical Settlement Company may assign such settlement or insurance policy only to another Viatical Settlement Company licensed pursuant to this article.” Other states such as Pennsylvania and Texas require that contacts with the insured for purposes of tracking and monitoring must be performed by a licensee. Florida statutes indicate the initial licensed provider remains responsible for all tracking and monitoring of insureds whose policies are resold under policy purchase agreements. Florida statutes do not provide clarification of how this requirement might apply to a portfolio purchase by a financing entity or secondary provider.

It can be argued that such problems would be identified during routine audits or as the result of complaint investigations. However, routine audits are not performed by all states and certainly not performed on a frequent basis by those states that do audit settlement licensees. In those audits that do occur, a relatively small sampling of cases are actually reviewed leaving the opportunity for such regulatory issues to be overlooked to be far larger than regulators or consumers would like.

The solution lies in updating the NAIC models, state statutes and regulations to more accurately reflect the current state of the industry and the evolving roles of its participants. And for the industry, participants must devote more attention to regulatory compliance research and controls in contractual agreements with financing entities and vendors in order to avoid regulatory violations.

Stacy J. Braverman, CEBS, HIA, ALHC, MHP is the founder and president of Regulatory Solution Associates, Inc., a compliance and legislative consulting firm providing services to the insurance and viatical/life settlement industries. She can be reached via email at [email protected].


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