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Life Health > Life Insurance

Sparks Fly as ACLI and LISA Square Off over STOLI

By Arthur D. Postal

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A top American Council of Life Insurers staff official today told members of the life settlement industry that a large “credibility gap” must be bridged if the two industries are to work together.

Michael Lovendusky, ACLI vice president and associate general counsel, said the credibility gap between the two industries is particularly broad on the issue of stranger-owned-life-insurance, or STOLI.

Lovendusky made his comments at the eighth annual Life Settlement and Longevity Conference, sponsored by Fasano Associates, held in Washington, D.C.

While making his comments, Lovendusky conceded under questioning that the life insurance industry must do a better job of underwriting in order to detect STOLI.

In presenting Lovendusky, Michael Fasano, president of Fasano and Associates, said that the life insurance and life settlement industries “should be on the same side of the table.”

“From my perspective, life insurance companies are among the most logical investors in life settlements,” Fasano said.

He said the investment makes sense in terms of hedging an insurance company’s other assets, “it makes sense in terms of the expertise the [life settlement professional] has on the actuarial and medical side and the added value they can bring to the process.”

Fasano added that he considered life settlements to be an enhanced settlement option that makes the life insurance contract a much more valuable proposition.

In responding to questions from the audience after his opening statement, Lovendusky said it is wrong for people in the life settlement industry to say that life insurers encourage STOLI.

Lovendusky noted that at its annual meeting last week in Orlando, insurance company officials said at a breakout session that insurers over the last few years have been trying to upgrade their screening practices for STOLI.

He also said that it is becoming more difficult for insurers to detect STOLI because in many cases, the vehicle for a STOLI is a trust.

He said that a trust document was formerly 20 pages, but that these are now sometimes 150 pages, and that in some cases the documents do not reflect that a subsidiary trust effectively represents a STOLI.

“It is difficult to interpret the complexity of applications,” Lovendusky acknowledged.

He said ACLI officials are being told by officials of the Life Insurance Settlement Association that LISA supports a model law crafted by the National Conference of Insurance Legislators in 2007 that outlaws STOLI.

But, in practice, Lovendusky said, that is not the case.

Specifically, he said that when ACLI officials ask state legislators to pass the model law, they are told that LISA officials are demanding changes in the model law, primarily involving STOLI.

Lovendusky said that if LISA officials indicate to state legislators that they support the model law, as written—and ACLI officials have told state legislators they do support the model law—then it is likely that all 50 states will enact the model law.

He cited amendments LISA has presented to state legislators purporting to support the definition of STOLI as set out in the model law, when in reality LISA does not support such a definition and instead supports language that would support stranger-owned life insurance.

Likewise, he cited a friend of the court brief LISA filed in Delaware that supposedly supported the ACLI’s position on STOLI, but the brief was never accepted by the court. Moreover, Lovendusky said, the brief did not support the ACLI’s position on STOLI.

Lovendusky said that the distance between LISA’s assertions and reality creates a credibility deficit that must be overcome if constructive dialogue can occur.

He cited comments by LISA that he said are “counter-productive, unnecessary, unhelpful irritants and antagonisms to the development of amicable relations.”

He pointed to one document published by LISA that says that, “an estimated 90% of all policies lapse before paying a claim,” and another document published by LISA, which criticizes the life industry’s policy of depositing the proceeds of life insurance policies into retained asset accounts when the policyholder dies.

“Life insurance companies regularly do not pay interest on death benefits, depriving beneficiaries of millions of dollars of unpaid interest every year,” Lovendusky said in citing one document. “Perhaps the most troubling aspect of this harmful conduct to beneficiaries is that in almost three-quarters of cases unpaid interest was paid immediately upon request by the beneficiary.”

In his comments, Lovendusky said that eliminating STOLI is among the top five priorities of ACLI members.

He also said that with support from LISA members, insurers can reduce the STOLI problem and instead turn their attention to other priorities.

Instead, Lovendusky said, the size of the ACLI task force on STOLI has grown as more and more ACLI members have become concerned about the issue.

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