The secondary market for life insurance caught a good deal of attention in 2009 from legislatures, regulators and the news media.
The increased awareness may have stemmed at least in part from the considerable growth of the life settlement industry. Life settlement companies have paid policy owners more than $10 billion over the past 10 years, which was $6 billion to $7 billion more than the cash surrender value of their policies, according to an estimate by the Life Insurance Settlement Association, Orlando, Fla.
Currently, 39 states regulate life settlements, LISA says.
Among states adding regulations on life settlements this year was Washington, where Gov. Christine Gregoire signed a law in April based on model life settlement legislation from the National Conference of Insurance Legislators, Troy, N.Y.
Significantly, Washington’s law requires that life insurers notify insureds age 60 and up who are seriously or terminally ill that they have alternatives to giving up or cashing in their policy.
Doug Head, executive director of LISA, noted that this was the nation’s first law requiring insurers to disclose the settlement option to policyholders as an alternative to cashing in or lapsing a life policy.
Washington’s law also specifies that life insurance policy owners may not enter a settlement agreement within 2 years of receiving their policy. It also requires that policies settled within 5 years of issuance be reported to the state Office of the Insurance Commissioner.
Also, in April, North Dakota enacted H.B. 1284, strengthening a state law prohibiting stranger-originated life insurance transactions.
As in other states enacting similar laws, North Dakota defined STOLI contracts as fraudulent transactions in which financial speculators persuade a senior to buy life insurance with the specific intention of transferring the death benefits to the speculators.
North Dakota’s law allows life insurers to ask policy application questions that would help underwriters spot STOLI deals. Another provision restricts use of some premium-financing arrangements typically associated with STOLI.
The law also requires settlement producers to give cost information and other relevant information to seniors considering life settlement transactions, and it requires them to submit information about their deals to the state insurance department.
Minnesota’s viatical settlements law went into effect Aug. 1. It modified existing statutes regulating settlements and required that brokers or providers must be licensed by the state where the person who is selling the life policy resides.
Minnesota’s law imposes restrictions on selling policies within 4 years after purchase. It also says that a licensed insurance agent in good standing may operate as a viatical settlement broker. In addition, it sets grounds for a settlement license to be suspended or revoked and for refusing to issue a license.
In August, Illinois Governor Pat Quinn signed a law prohibiting STOLI and aiming at protecting consumers who enter into viatical settlements in the state.
The law imposes disclosure requirements and licensing and ethics standards on viatical and life settlement providers.
In October, California Gov. Arnold Schwarzenegger signed a bill banning STOLI in the state and prohibiting policy owners from entering into a life settlement for 2 years after a policy is issued.
Although the law was praised by LISA, the American Council of Life Insurers, and other industry groups, it disappointed some in the industry.
The California Life Settlement Association said it opposed the law because it failed to require life insurers to notify policy holders that life settlements are an alternative to lapsing or surrendering their policies.
In November, New York Gov. David Patterson, D, signed S. 66009, a life settlement regulation bill that was also based on the model act developed by NCOIL.
The law establishes disclosure requirements, privacy protections and rescission rights. It also requires licensing of settlement companies and provides for their oversight by the New York insurance department. The law bans STOLI and provides several tools for insurers and life settlement companies to detect and prevent STOLI. It also imposes penalties for those engaging in such transactions.
Also in November, the Life Settlements Act was passed in Rhode Island without Gov. Donald Carcieri’s signature. The law, which takes effect July 1, 2010, bars STOLI deals. It also requires brokers to disclose compensation and other information to policy owners. In addition, it mandates that life settlement companies seeking to do business in Rhode Island register and pay a fee to the state’s Department of Business Regulation.
Other states adopting bills that seek to eliminate STOLI this year were Nevada and Vermont, which both limited the ability of policyholders to sell policies within 5 years after they have purchased the policies.
The industry scored a victory in Ohio in February, when the state’s Ohio Department of Insurance withdrew its demand that brokers provide detailed information about life settlements they completed in the state.
The department retreated from its order after it received complaints from brokers that its demand was onerous and overreached its authority. Some brokers also argued that providing the requested information could subject them to lawsuits by clients for revealing confidential data.
In November, an administrative law judge in Florida dismissed a life settlement firm’s claim that state regulators have no right to demand records of its out-of-state business.
A judge in the state’s Division of Administrative Hearings rejected the contention of Coventry First L.L.C., Fort Washington, Pa., that the Florida Office of Insurance Regulation had failed to follow state law when it set up a procedure for demanding the business records of settlement firms operating in the state.
The judge agreed with the Florida OIR that state law gives the agency the authority to examine all books and records and that it “does not differentiate between in-state and out-of-state records.”
An attorney for Coventry says the company will appeal the decision.
Meanwhile, a survey of life settlement firms by LISA found 43% have stopped doing business in one or more states due to what they perceived as adverse regulations.
Half of the companies that have stopped doing business in at least one state said bonding requirements or other licensing provisions were the reason they pulled out, according to LISA.
Settlement firms most often cited North Dakota, West Virginia and Vermont as states they had left due to concerns about laws and regulations. All 3 states restrict use of settlements during the first 5 years after a life insurance policy is purchased.
North Dakota and West Virginia also require life settlement providers to carry a surety bond, LISA notes.
Starting Oct. 1, Vermont prohibited brokers from earning more than 2% of the amount paid by a life settlement company to the policy owner.
The industry also saw some stirring from regulators on the national level.
In April, the U.S. Senate Special Committee on Aging held hearings into life settlements, citing fears that the arrangements may pose risks for seniors.
In September, a Senate subcommittee held its own hearings, stimulated at least in part by an article in the Sept. 6 New York Times reporting that investment banks had bundled life insurance policies into bond-like investments in an effort to spread risk and attract institutional buyers and other investors.
With an estimated $26 trillion of life insurance policies in force in the United States, life settlements represent enormous financial potential for investment banks and others in the industry, according to Times reporter Jenny Anderson.
The gist of Anderson’s article was that the packaging of life insurance policies as investments resembles the strategy investment banks used to bundle mortgage-backed securities into bonds, many of which proved almost worthless when the real estate market crashed.
Industry leaders criticized the article for missing the point of life settlements as an opportunity for older Americans to get value from unwanted policies
On Sept. 24, partly in response to the Times article, a subcommittee of the House Committee on Financial Services held a hearing on the issue of securitization of life settlements.
At that hearing, an executive of the Securities and Exchange Commission reported the SEC has created a task force to look into the life settlements market and to advise SEC officials on whether there were any gaps in oversight of the industry.
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.
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 from 50% to 75% between the first half of 2008 and the first half of 2009, Russel Dorsett, president of LISA, told the committee.
“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.