The Government Accountability Office (GAO) recently released a report determining that regulatory inconsistencies governing life settlements pose a number of risks for consumers and brokers.
The report notes that there is no comprehensive data for life settlements, but estimates that the market “grew rapidly from 1998 until the recent financial crisis.”
After increasing from 2006 to 2008, the number of policies settled declined in 2009, the report found. In 2009, over 2,600 policies were settled with a total face value of $7.01 billion, down from 4,505 in 2008. Policy owners were paid a total of $890 billion and brokers made $90 million in commissions from the sale of life settlements, in 2009. In 2008, the total value of policies settled was nearly $13 billion. Policy owners were paid more than $2 billion and brokers’ commissions were $280 million.
Life settlements are regulated by state insurance laws, which oversee the “front-end transaction,” or the sale of a policy by its owner to a provider; and by state and federal securities laws which regulate the “back-end transaction,” or the sale of the policy to an investor from the provider.
As of February 2010, 12 states and Washington, D.C., have yet to establish laws regulating life settlements. Variable life policies are subject to regulation by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA); however, conflicting opinions from U.S. Courts of Appeals for the District of Columbia and the 11th Circuit have limited the SEC’s jurisdiction over life settlements involving other types of insurance policies.
Challenges identified in the report are a consequence of regulatory inconsistency. Policy owners in some states may be less protected than those in other states, and consequently may have more difficulty accessing important information. Furthermore, differences in court decisions and state laws about whether life settlements are securities may prevent investors from getting information they need about their investments.