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.
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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.