Once a life policy has been settled, 50% of direct writing life insurers say their company procedure is to “terminate producers circumventing the system” and 33% say they would “consider rescinding the policy if it is sold,” according to a new report.
Brian Smith, president of the Life Settlement Institute, Hudson, Ohio, says that’s “anti-consumer,” but David N. Wylde, the current chairman of the subcommittee that issued the report, believes those same responses are “proactive” for the insurance companies.
The report is based on a survey a done by the life settlements survey subcommittee of the Society of Actuaries, Schaumburg, Ill. Released earlier this year, it drew responses from 19 direct writing carriers that have total individual life face amounts in force ranging from under $50 billion to over $500 billion. In many questions, such as the one above, respondents were able to indicate more than one selection.
Wylde, a research actuary at Transamerica Reinsurance, Charlotte, N.C., highlighted some of the key findings during a breakout session at a recent life insurance conference in Washington, D.C. The conference was sponsored by LIMRA, LOMA, SOA, and ACLI.
“Terminating producers for circumventing the system” is something that companies can do in response to life settlements, Wylde said. “It’s very proactive.”
If a company doesn’t want to see their policies being settled, he continued, it can “incentivize” producers away from trying to get life policies sold by taking this approach.
As for policy rescissions, Wylde noted that carriers do rescissions in the first couple of policy years–during the contestable period–if there is something “not right” about the transaction. Typically, he added, if a company looks at a block of settled policies, that usually happens in year three–and that is outside the contestable period, so “there is not much companies can do (to rescind) then.”
But Smith, when contacted by Settlement Watch about the survey findings, said that the two practices–producer termination and policy recession–are “inappropriate and without justification.” His organization seeks to foster knowledge of life settlements among insurance and financial planning professionals.
Consumers have had the right to sell their life policies since 1911, Smith says.
“Also, 39 states have legislation in place governing life settlements, and four states now require life insurance companies to notify consumers of life settlements when they send the consumer a lapse notice.”
That means “it is inappropriate to terminate producers who are providing their clients with appropriate guidance on life settlements,” he said. “And there is no legal justification for rescinding a life policy due to the fact that a legal life settlement takes place.”
In the SOA report, the researchers point out that survey data was collected in mid-2008. Financial conditions have changed significantly since then, they write, so overall financial repercussions from the economic downturn of last year might have affected the life settlement process, and individual conditions for some respondents may have changed, too.
In view of that timeline, Smith allowed that “possibly, the respondents were unaware of the current regulations on settlements that prohibit life insurance companies from interfering with the life settlement process.” A number of settlement laws and regulations have been updated or enacted since 2008, he added.
In the survey, the company strategy used by the most respondents (75%) was this: Once a life policy has been settled as a life settlement, the established procedure at the company is to “monitor beneficiary and policyowner changes.”
Wylde said insurers are not going to change marketplace behavior by monitoring. But he said the activity does mean the companies are enabling themselves “to know” what is going on.
The SOA report also identified other procedures that companies might follow once a policy is settled. These include monitoring term conversions, monitoring joint and last survivor policies (e.g., first deaths), monitoring experience, and repricing products at the older ages.
But a few respondents wrote comments on their surveys indicating that their own companies were not taking such steps. As one respondent put it: “Depending on timing of settlement, we may or may not do as checked.” Another said: “Nothing formal yet, since our exposure is so small.” Yet another said: “Too few to monitor any of these items.”
Even so, the survey indicates that some companies, even in 2008, were taking steps to respond to exposure to life settlements.
For instance, 61% of 13 carriers said they had changed their pricing assumptions regarding lapses, as a result of exposure to life settlements. Some also changed pricing assumptions related to mortality (23%), guarantees (8%) and commissions (8%).
Furthermore, 15 carriers indicated their companies have integrated “protective mechanisms” into their sales and underwriting processes, said Wylde. The top four mechanisms they said their companies are using are: educate underwriters in identifying life settlement cases, ask a question of the application, monitor and control producer incentives and review trust agreements.
What asked for the companies’ current approach to the life settlement market, 55% said they have no current plans to become involved, said Wylde. But 27% said they plan to investigate future involvement, 9% plan to establish a separate business unit, and 9% plan to actively purchase policies as an investment.