Stranger-originated annuity transactions (STATs) have stirred up the ire of professionals in the life settlement and life insurance businesses as well as from the fixed and variable annuity businesses, broker-dealers and more.
For example, the Life Insurance Settlement Association, Orlando, Fla., and the American Council of Life Insurers, Washington, have condemned the transactions, as reported here previously. (SeeLISA Blasts Stranger-Originated Annuities and also Stranger-Originated Annuities: It’s About More Than Annuities.)
Those blasts occurred during a May hearing http://www.naic.org/committees_a.htm held by the Life Insurance and Annuities Committee of the National Association of Insurance Commissioners, Kansas City, Mo.
Analysis of other written testimony submitted at the hearing reveals other industry leaders also ripped into STATs, but not without differences–in terminology, understanding and recommended actions to curb STATs.
LISA, the Life Settlement Institute, Hudson, Ohio, and several other trade groups referred to the transactions as stranger originated annuity transactions, or STATS (the term used in this article).
But the National Association for Fixed Annuities, Milwaukee, Wisc., called the transactions stranger-originated annuities, or STOAs.
The American Academy of Actuaries, Washington, D.C., used the term stranger originated life annuities, or STOLAs.
The Insured Retirement Institute, New York, N.Y., mostly bypassed the term stranger originated/owned annuities terminology altogether, preferring instead to talk about warding off “schemes” involving annuities.
The schemes named by IRI’s General Counsel J. Lee Covington II were: 1) a guaranteed living benefit scheme, such as buying a VA that has a guaranteed minimum withdrawal benefit and then immediately triggering the annual payments (this would be possible if insurers could no longer terminate a VA’s guaranteed living benefit on annuities that are sold or assigned, Covington says) and 2) a death benefit/commission scheme (involving collusion by hospice workers, attorneys, advisors and others in predatory scams involving purchase and sale of annuities).
Different understandings of STATS
Some speakers discussed STATS as if the transactions involve all types of annuities, but others say the STAT problem is limited to variable annuities. Consider:
Joseph Torti III, Superintendent of Insurance for Rhode Island, said the stranger-originated annuity transactions that emerged in his state involved “single premium annuities that have a death benefit if annuitant dies before annuitization date.”
The owner puts up funds and designates a beneficiary and the annuitant is an unrelated terminally ill person, Torti said. The application does not ask about the health of the annuitant, although some have asked for a statement about the relationship but the producer leaves this blank, he continued. The transactions avoid underwriting by starting with a low face amount and adding additional funds after issue, he added. Sometimes, he said, multiple annuities have been issued on the same day but with different insurers so that the annuitant does not show up on more than one annuity with a single insurer.
As for the annuitants, Torti said they are “recruited” through “hospice and Catholic newspapers” and typically receive $2,000-$5,000 from the investor. But the annuitants are “unclear on their participation in the annuity contract,” he said, explaining that they believe they have received the money as a charitable gift due to their medical condition.
Kim O’Brien, executive director of NAFA, a trade group focused on fixed annuities, clarified that “fixed annuities have not historically been used for STOAs.” Still, she said, NAFA is alerting its members about the transactions “to ensure they have safeguards and systems in place that will help protect the consumer from unscrupulous practices.”
Many speakers spoke of STATS only in terms of variable annuities.
For example, Caleb J. Callahan, vice president-investment services for ValMark Securities, Inc., Akron, Ohio, said STATS “by definition” involve variable annuities.
(Callahan also pointed out that STATs are not the same as secondary market transactions for annuities. The latter involve consumers who have made legitimate annuity purchases for their personal accounts but who later sell the annuity to investors because they no longer want the policy, he said.)
Similarly, Kathleen A. Birrane, Esq., speaking on behalf of LSI, said “STATs involve the issuance of variable annuity products, which can only be issued by individuals who are licensed at both the state and federal level and who are members of the Financial Industry Regulatory Authority.”
Different recommendations for action
The testimonies also reveal divergence over whether regulators need to update or develop regulations to curb STATs.
Speaking in favor of certain reforms was Cande Olsen, chair of the Life Products Committee of the American Academy and an actuary in the New Jersey office of Actuarial Resources Corporation of Georgia.
She recommended that “consideration be given to modifying the Viatical Settlements Model Act (of National Association of Insurance Commissioners) to ensure that the transactions the model seeks to regulate for life insurance are also regulated for annuities.”
In addition, Olsen said that consumer protection would be “stronger” if the Interstate Insurance Product Regulation Commission filing requirements were supported by “specific laws on the issue” of terminations of existing guaranteed minimum death benefits on policies that are sold.
The IIPRC requirements currently permit insurers to terminate such features upon sale of a policy to an investor, Olsen indicated, quoting the IIPRC statement that “eliminating restrictions on termination could potentially result in significant increases in cost for all consumers of these products.”
Testimony submitted by Prudential Financial, Newark, N.J., supported current laws but allowed that some “expansion” might help curtail STATs. Laws and regulations are already in place that, “if aggressively enforced or, in some cases, expanded, could prevent stranger owned and/or originated annuity transactions from taking place,” the statement said.
But Prudential also called for strong enforcement. “Regulators must preserve insurers’ contract rights, including the right to terminate a guaranteed living benefit rider to a variable annuity in the event the annuity is sold or transferred,” the company statement said.
“We would also suggest the regulators: aggressively enforce anti-rebating laws and expand those statutes to apply to transfers as well as original sales; and support Securities and Exchange attempts to prohibit securitization of insurance and annuity products.”
Other speakers didn’t address the need for expanded or new regulations at all. Instead, they championed use of regs and laws currently on the books.
For instance, IRI’s Covington said regulators already “have the tools necessary to address the death benefit scheme.”
In addition, regulators should “continue to support the use of appropriate contract provisions to protect the design and pricing of annuity products with guaranteed living benefits,” and to support the guaranteed living benefit standards of the Interstate Compact (IIRPC), Covington said.
Covington also pointed out that “most if not all states have laws addressing rebating, fraud, misleading advertising, suitability and insurable interest.”
Similarly, NAFA’s O’Brien said carriers and producers already have “sufficient tools to prevent these sales.”
She pointed to the current NAIC Suitability in Annuity Transactions Model Regulation adopted in 40 states and the NAIC Disclosure Model Regulation as well as the revisions to the Suitability Model adopted this March as examples. Those regulations “provide the necessary framework for carriers to obtain information that identifies unsuitable sales which do not benefit the consumer,” O’Brien said.
ValMark’s Callahan said his firm “strongly opposes” STATs, but added that “we believe the best means to accomplish this is through existing laws and the current regulatory framework.”
Existing regulatory bodies are already taking action against those accused of perpetrating STATs, and insurance companies are taking proactive steps to address the problem too, he said.
Callahan also named some steps that he suggested could help insurance companies deal with STATs. These include: adopting a company policy prohibiting issue of annuities to certain types of ownership structures, asking questions on the application that relate to facts that indicate STATs, and designing a process that builds a better case against STATs.
Likewise, LSI believes that “current laws provide all necessary tools to protect consumers,” said its representative, Birrane, who is senior vice president and general counsel of Maple Life Financial Inc., Bethesda, Md. “FINRA’s comprehensive regulation of practices prohibit registered representatives from inducing a client to participate in a securities transaction through misleading or fraudulent means or from offering economic inducements.”
FINRA also requires that broker-dealers actively supervise securities transactions and oversee the suitability of security sales, including sales of variable annuity products, Birrane continued.
“Thus, the infrastructure and regulatory authority is already in place at the federal level to assure that STATs do not occur,” she said. In addition, she said that similar laws exist on the state level “to prevent insurance agents from selling unsuitable products, offering inducements, and rebating.”
About the transactions themselves, Callahan summed up the prevailing view: “Almost any person would acknowledge these transactions create a moral hazard and are bad for society.”
Related article: NAIFA Opposes Stranger-Originated Annuities
Analysis from the Academy:
Comparing STATS to STOLI
Source: American Academy of Actuaries, Washington, D.C.