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ACLI Urges SEC to Target Life Settlement Industry

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The American Council of Life Insurers, calling the secondary market for insurance products dangerous in another salvo at life settlement companies, appealed to the Securities and Exchange Commission (SEC) in a letter today that the securitization of life settlements should be prohibited but also wants federal law amended to include viatical and life settlements as securities.

However, ACLI agrees with the SEC recommendation that that life settlements themselves be excluded from the definition of “security” for purposes of Securities Investor Protection Act (SIPA) coverage.  

“As documented by the SEC Task Force and as evidenced by the persistent reports by officials and media of abusive investment schemes involving life settlements, the secondary market for insurance products is dangerous,” the ACLI stated in its letter.  An exclusion of life settlements for purposes of SIPA coverage “warns investors of the relatively greater risks of the investment class,” and eliminates “the misuse of SIPA coverage as a marketing tool for settlement investment promoters attempting to assuage investor concerns,” it claimed.

ACLI supports a prohibition on securitization because the practice exposes senior citizens and investors to increased risk of fraud, it alleged. Moreover, the ACLI is concerned securitization of life settlements will increase occurrences of stranger-originated life insurance (STOLI) transactions. But that may be tossing out the baby wth the bathwater.

Life settlements paid policyowners $5.62 billion more than they would have received from insurers in a surrender of the policy in just four years, from 2006-2009, according to the Government Accountability Office report issued in conjunction with the SEC report, the life settlement industry pointed out.

STOLI transactions have been outlawed in 28 states and other states are considering anti-STOLI legislation. Seniors caught up in STOLI schemes face potential legal and tax liability.

The life settlement industry fired back at the primary life industry’s tactics.

“This is just another effort by the carriers to deflect attention from their sustained efforts to deny death benefits and annuity benefits to widows and orphans that is estimated to exceed one billion dollars, through nonpayment of claims to beneficiaries and the use of retained asset accounts,” Michael Freedman, senior vice president of government affairs for Coventry, the Fort Washington, Pa.-based life settlement company.

 ”The ACLI’s own press release says it all: ‘Securitization is a very effective means of market-making and encouraging rapid expansion of a ‘product’, in  this case, life settlement contracts.’ The life industry acknowledges that securitization grow markets and they have a vested interest in attacking the expansion of secondary market for life insurance,” Freedman told National Underwriter.

Courts have weighed in on the life insurance policy settlement industry, most recently with PHL Variable vs. Price Dawe 2006 Insurance Trust Insurance Company, in which the court has affirmed the common law ability of a legally insured person or insurable trust to sell a policy on that person’s life for market value — provided that procurement of the policy is not part of a straw purchase pursuant to a prior agreement to resell to an investor, and that the procurement is not part of an illegal wager in which a third party directly or indirectly pays the premiums.

In its bid for more regulation of settlement producers, the primary life insurance industry does not want another overlay of regulation on insurance producers and settlement brokers, as proposed by the SEC in its July 2010 Task Force Report. Instead, it favors additional regulation solely on settlement providers.

The SEC Task Force report noted that any future life settlement securitizations faced significant obstacles. 

The ACLI is opposed to a federal license for insurance producers and settlement brokers and their regulation under the federal securities laws because a state license is enough: “With the producer and the settlement broker clearly responsible to insurance authorities with regard to their specific roles in any insurance policy origination or settlement on behalf of a policy owner, there is no apparent justification to visit securities licensing requirements upon the insurance producer or settlement broker,” the ACLI stated.

The DC-based organization noted that 29 states also have settlement laws in which the settlement broker has a fiduciary duty to the policy owner.

But not so fast, providers. At the same time, the ACLI stated, “it is appropriate to require that settlement providers obtain a federal securities license since the provider is representing investors and purchasers of life insurance policies for investment purposes.”

Moreover, the SEC should indeed instruct staff to monitor that legal standards of conduct are being met by settlement providers under the federal securities laws and FINRA rules, the ACLI said. The ACLI went so far as to recommend examination and enforcement efforts, consideration of whether existing licensing schemes should be expanded, as well as mandating investor education efforts.

The Life Insurance Settlement Association (LISA) initially responded to the ACLI’s bid for prohibiting securitization of life settlements back in February 2010 by stating the ACLI’s position is “not only an affront to the principal of free and open capital markets, but it cynically portrays them as a protector of consumers, when in fact, their objective is to deprive consumers of their right to receive a true market value from a financial asset: a life insurance policy which is no longer needed, wanted, or affordable; one for which they have paid good money, often for many years.”