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The Korean War

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JIm Avery is Prudential’s president of individual life insurance, and an outspoken critic of both the life settlements industry and stranger-owned
life insurance (STOLI). He recently traveled to South Korea in an effort to convince the life insurance industry there to not allow the practice of life settlements.

What made you go to South Korea? South Korea has no legislation that allows life settlements, viaticals or STOLI, so it’s virgin territory there. The head of their Democratic party, a Mrs. Park, is putting forth legislation to allow life settlements, so I went there to explain why this might not be good.

Let’s hear your elevator pitch. I explained that life settlements are prone to promote fraud, but even without that, they are an inappropriate use of a consumer contract in an institutional space that should not be allowed. I made this argument to the head of the Democratic Party, the head of the Korea Life Insurance Association, and the head of their Financial Services Commission. They all had different views.

What did Park think? She noted that in this tough economy, people were letting their policies lapse without getting any value from them. In contrast, she saw the settlement industry as giving them tremendous value. But the question that she can’t answer for me or anyone else is, where is that money coming from? It comes from the insurance company, which means that all consumers will pay for the benefit of the investors coming into this industry. Why would you want the mom and pop consumer to pay more for insurance, just to benefit Wall Street? Hasn’t Wall Street done enough damage?

Did the life settlement industry make its case separately to South Korean lawmakers? Mrs. Park is very educated on this subject which leads me to believe that there is some part of the settlement industry out there educating her. She knew too much, given their lack of having an industry.

What if South Korea regulated life settlements from the start? As I told Mrs. Park, in the United States, based on SEC data, the average settled policy in the U.S. in 2007-8 had an average face amount of $2.2 million and 50% of them were issued within five years or less. But if you talk to producers about STOLI, they all have their own story for why what they’re doing isn’t actually STOLI. It’s sort of like how nobody voted for Nixon. And since nobody admits to doing STOLI, it makes the regulations ineffective.

How successful do you think you were? I think it differs by audience. I think I was very successful with the KLIA. At one meeting, I was talking to a producer and he was arguing with me about why STOLI was okay. So I asked him how he would feel if I bought a $1 million policy on his 12-year-old daughter. He asked, why would I do that? I asked him, what did it matter? Was he now worried that something might happen to his daughter? That’s why you shouldn’t be able to buy insurance on people you don’t have an insurable interest in. People get murdered for their insurance every month. We know the stories.

So what’s the alternative? I told Mrs. Park that if she was worried about her constituents not getting enough cash value at surrender, then the Korean government should just go ahead and mandate higher cash values. The price of insurance would go up, but everybody will have equal access and it will be much more efficient because there will be no middleman getting paid on it.

And? People in the insurance industry cringed a little bit because it makes their product more expensive, but it’s what the settlement industry is going to do to them anyway.

Interview by Bill Coffin


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