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Life Health > Life Insurance

Mitchell: Carriers Resist STOLI

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Orlando, Fla.

Life insurers are “pushing back” against what they believe to be inappropriate settlement cases, a panelist said here at the Life Insurance Conference.

Some carriers, for instance, are filing lawsuits against originators of such cases, said panelist Maggie Mitchell, vice president-advanced markets in the Denver office of ING, a unit of ING Groep N.V., Amsterdam.

Typically, these lawsuits charge misrepresentation or failure to prove insurable interest, she said at the meeting, which was co-sponsored by LIMRA International, Windsor, Conn.; LOMA, Atlanta; Society of Actuaries, Schaumberg, Ill.; and the American Council of Life Insurers, Washington.

“We’ve also terminated agents for cause–if all of the agent’s business is settled, for instance,” Mitchell said. “We’ve also turned some agents over to the licensing authorities.”

Legitimate life settlements are not the target, Mitchell stressed, explaining that “there is an appropriate place for settlements.” Rather, “it is the (life) policies that are purchased with the intent of settlement that is our focus,” she said.

Insurers are particularly interested in stopping placement of stranger-originated life insurance policies, Mitchell emphasized.

State regulators are taking action on this, too, she said, reporting that 17 states have already enacted anti-STOLI legislation, and that 20 others have proposed such legislation. But carriers have decided they also need to respond.

If such policies do get issued and carriers later find out they involve STOLI, some carriers move to rescind the policies, Mitchell said.

Other “STOLI strategies” she identified include: flagging applications by age, premium finance, face amount and other factors that may help detect STOLI; reviewing documentation to see if “stealth trusts” are involved (such trusts can change ownership interest without the carrier knowing, she cautioned); and asking on the policy application about whether the applicant intends to sell the policy.

Some insurers question the producer who submitted the application, Mitchell said. When it’s a STOLI case, she said, the one who sells the contract and the one who submits it are often different people. The questioning can help uncover this.

Insurers are also contacting the insured directly. This often surprises the insured, Mitchell said. “People will say, ‘Why are you calling? I’m not buying life insurance. I already have my money.’”

Other insurers are keeping an eye out for producers who ask a carrier to approve multiple applications for the same insured, she said.

In today’s market, she explained, it is getting harder to sell the really big policies, so some producers may ask for 4 policies of $2 million each for the named insured instead of one $8 million policy. That’s a flag for insurers, she indicated. They will then ask the agent, “Why split it?”

The settlement market faces other challenges, too, pointed out co-panelist James O. Mitchel, vice president-LIMRA developmental research at LIMRA, Windsor, Conn.

The market grew rapidly, to an estimated $12 billion in force in 2007, not including STOLI, from under $2 billion in 2002, he noted, and he said some researchers estimate it could grow to over $100 billion several years from now. The appeal to investors is that settlements are an asset class offering low risk and the potential for generating double-digit returns, Mitchell said.

Still, he said, settled policies represent less than 2% of in force business.

Although perceived as a low-risk asset class, life settlements do entail several investment risks, he said. Examples include insurance company credit risk, changing longevity, and buyer liquidity risk.

Buyer liquidity is important, because the buyer needs to have the cash to keep up premium payments.

Furthermore, Mitchel said, only about 1/3 of consumers that LIMRA surveyed had even heard of settlements. Only 10% expressed any interest in the transactions, and just 3% reported ever being approached about a settlement. So consumer understanding will affect growth too, he predicted.


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