WASHINGTON BUREAU — Rep. Paul Kanjorski has acknowledged that life settlements may help consumers, but he says he worries about the consequences of permitting life settlement securitizations.

Permitting investment bankers to create securities backed by pools of life insurance policies, could create “a slippery slope that will lead to indexes based on divorce rates and swaps tied to gambling,” Kanjorski, D-Pa., chairman of the House Financial Services Committee capital markets subcommittee, said today at a subcommittee hearing on life settlement securitizations.

Kanjorski scheduled the hearing after The New York Times published a front-page article on the rise of the life settlement securitization market.

After hearing testimony the topic, “we may decide that the best policy is to keep this Pandora’s box shut,” Kanjorski said.Capitol

A life settlement industry representative who spoke at the hearing scoffed at claims that life settlement securitizations could be a threat to economic stability.

Steven Strongin, a managing director at Goldman Sachs Group Inc., New York, said the “handful of life settlement securitizations that have occurred to date, appear to have had little or no impact on the life settlement or life insurance markets.”

Only about $1 billion in life settlements have been securitized since 2000, Strongin estimated.

“This remains one of the smallest and most sporadic of the securitization sectors, and while we have never been involved in a life settlement securitization, we see little investor interest in such a market given its size as well as numerous structuring challenges,” Strongin said.

Life settlement securitizations do not appear to pose any special securitization-related risk, and they can be treated like any other securitization, Strongin said.

“However, there does appear to be special issues in terms of consumer protection in life settlement in general that may be appropriate for Congress or a regulator appointed by Congress to address,” he said.

Meanwhile, the current economic crisis, caused in part by problems with securitization of subprime mortgage loans, has caused the underlying level of volume in the life settlement market to decline about 50% to 75% between the first half of 2008 and the first half of 2009, according to Russel Dorsett, president of the Life Insurance Settlement Association, Orlando, Fla.

“It is somewhat ironic that we might be perceived to be a threat, in that this particular industry has suffered mightily due to the current financial crisis,” Dorsett said, according to a written version of his remarks posted on the Financial Services Committee website.

Life settlement volume is down mainly because of a death of investment capital, Dorsett testified.

Paula Dubberly, associate director of the Division of Corporation Finance at the U.S. Securities and Exchange Commission, testified that the SEC has created a Life Settlements Task Force to examine emerging issues in the life settlements market and to advise the SEC on whether market practices and regulatory oversight can be improved.

She said the new panel is reaching out to other regulators, both state and federal, “to obtain a greater overview of the life settlements marketplace and assess any regulatory gaps.”

A primary concern is that while some holders of life insurance policies may be looking for additional liquidity, “these individuals may be more vulnerable due to the current environment,” Dubberly said. “The task force will consider ways to better inform and protect these individuals:”

Susan Voss, vice president of the National Association of Insurance Commissioners, Kansas City, Mo., and Iowa insurance commissioner, said life settlement transactions must be appropriately regulated.

But “life settlements are necessary transactions for some consumers,” Voss said.

Regulators and legislators “must ensure that life insurance beneficiaries – those people holding that insurable interest, such as relatives of the deceased – will still be able to receive their proceeds tax-free,” Voss said.

Regulators and legislators also must work to protect the privacy rights of consumers who participate in life settlement transactions, Voss said.

When a life insurance product becomes part of an investment product, “the rights of the insured must still be guaranteed,” Voss said.

Copies of written versions of the witnesses’ testimony and a recorded version of the hearing webcast are available here.