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Life Health > Annuities

Stranger-Originated Annuities: It's About More Than Annuities

By Allison Bell

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The battle over stranger-originated annuities is part of a larger battle over the insurance product resale market, representatives from an insurer group and a life settlement group agree.

Witnesses from the American Council of Life Insurers, Washington, and the Life Insurance Settlement Association, Orlando, Fla., appeared Thursday at a STOA hearing organized by the Life Insurance & Annuities Committee at the National Association of Insurance Commissioners, Kansas City, Mo.

Originators of STOA transactions persuade people with short life expectancies to buy annuities with guaranteed minimum death benefits, with the death benefits going to the originators or other parties.

The ACLI, Washington, and LISA, Orlando, Fla., have joined with other groups in condemning STOAs.

The transactions appear to involve fraud, material misrepresentations on the annuity applications, and, in many causes, an inducement to the annuity applicant that violates most states’ Unfair Trade Practices acts, according to a written version of the ACLI testimony prepared by Kelly Ireland and Michael Lovendusky.

“It appears that most, if not all, of these schemes, violate a wide variety of existing insurance laws,” LISA Executive Director Doug Head said in the written version of LISA’s testimony.

Cande Olsen, chair of the Life Products Committee at the American Academy of Actuaries, Washington, testified that letting STOA transactions continue could hurt all buyers of variable annuity contracts that include guaranteed minimum death benefits, by increasing insurer GMDB costs.

“We have no provided any specific numerical analysis as our perspective is founded primarily from the conceptual view that [STOAs] are not a proper use of annuities,” Olsen said in the written version of her testimony. “We draw parallels between [STOAs] and the suicide exclusion clause in life insurance. While the cost of paying benefits for suicide claims in the first two years of a life insurance policy could be quantified, the argument in favor of the suicide exclusion provision is not cost-based. Purchasing a life insurance policy with the intent of an early claim due to suicide is not the proper and intended use of life insurance.”

Head argued that life insurers have contributed to the problem by failing to screen annuity applicants properly, and that the ACLI is using the issue to as a Trojan Horse against the life settlement industry.

“Life insurers were in a position to take preemptive action and stop these transactions from ever occurring, but they failed to implement common sense safeguards, institute obvious disclosure and eligibility review procedures, and properly train and supervise their appointed agents,” Head said. “We are concerned about and object to these efforts that attempt to connect illegitimate and fraudulent sales of annuities – and the failure of insurers to protect against these abuses – to the lawful and beneficial secondary market for life insurance.”

The ACLI has focused on recommending measures that would affect legitimate life settlements, rather than coming up with proposals targeted to address the STOA problem, Head said.

Ireland and Lovendusky said the ACLI is concerned that the most recent STOA transactions are a “continuation of a larger trend involving insurance products.”

“These transactions undermine the principles upon which insurance products are created,” Ireland and Lovendusky said. “The manipulation of insurance values exploits individually designed products to benefit investors systematically extracting product values with behavior inconsistent with individual risk behavior. The investors have no concern about the detrimental effect of their activity on the insurance system as a whole.”

This type of activity already affects life insurance and annuities, Ireland and Lovendusky said.

“Concerns are growing that disability income and even long-term care products might have features susceptible to exploitation,” Ireland and Lovendusky said.

Life insurers might be able to prevent some STOA transactions by underwriting annuity applicants more thoroughly, but an increased level of scrutiny will increase costs and paperwork burdens for all applicants and might make some annuity features difficult or impossible to sell, Ireland and Lovendusky said.

In response to a question about whether current laws and regulations should be changed, Ireland and Lovendusky said, the “ACLI is studying the clarity and adequacy of existing laws and regulations and will communicate later this year whether it would recommend specific new or revised laws or regulations.”

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