In Jake Bernstein’s recent article, “Death Takes a Policy,” he writes about Joseph Caramadre, a Rhode Island financial planner and attorney whose close reading of the law has instead gotten him in deep trouble with it. Caramadre determined that when it came to variable annuities, Rhode Island had no insurable interest requirement statue, and so he devised a scheme whereby he could get elderly and dying people to take out variable annuities that he would then sell to investors or simply keep himself. The typical enticement for this was a check for $2,000, and the transaction was typically done under the guise of Caramadre acting as a self-styled “charitable organization” coming to give people in need a few much-needed dollars.
As you might imagine, insurers cried foul and Caramadre and his associates were investigated on a range of criminal charges. Based on my own personal reading of things, I can’t imagine Caramadre going down for much of anything. One of the folks who worked with him, however, and appears to have forged signatures for annuitants in at least one occasion, might be looking at a conviction. But this is all speculative; we won’t know what happens to Caramadre until his case goes to trial.
The Caramadre case touches multiple nerves for me. My first reaction to it is distaste. What Caramadre is doing strikes me as deeply creepy and even predatory, something Caramadre himself would probably not deny. To him, he is clearly making money off of the dead. But he figures, funeral homes and cemeteries do as well, so why not him? That is not a sufficient explanation for me, but I can see how it might be for him. Basing one’s business off of the death of others does come off as cruel and callous on one hand, but if you extrapolate that out, isn’t that what life insurance really is? And who in their right mind would demonize that business as creepy? Or predatory? Just the opposite; there is a nobility in selling products to people that maintain families and businesses after a passing.
My second reaction to Caramadre is one of grudging respect. I still don’t particularly care for the fact that his business model is based entirely on fitting through a little loophole in the law. My gut tells me there is no real insurable interest with his clients, and that there should be. He is clearly using variable annuities in a way contrary to how they were intended to be used. That may not make it right. But does that make it illegal? According to him, no; the law lets him do this. And this is an important distinction to make, since Caramadre is not openly flouting the law here. He is openly being coy with it, but still operating within what he thinks is legal. There is something a little frustrating and off-putting about one who is taking advantage of shortcomings in the law for personal gain when a strong moral code would prevent doing otherwise. Caramadre strikes me as a shady guy. But he also strikes me as somebody whose greatest crime is embarrassing the insurance industry by figuring out how to turn its rules against itself. I am reminded of the life settlements industry, and how it basically got rolling by doing the same kind of thing. Maybe not quite as openly self-serving, but it still was based on a close reading of the law and an inventive use of insurability rules that eventually, the industry had to accept. Caramadre might be the guy on the hot seat now for it, but I can also see him being the guy who kickstarts an entirely new alternative insurance market, especially if the criminal charges against him don’t stick.
My third reaction to Caramadre is that his legal prosecution is a loaded one, and one that reminds me of the prosecution of Glenn Neasham. Neasham, as I’m sure you are aware, was hit for counts of felony theft after he sold an annuity to an old woman with dementia. Neasham contends he did not think she was mentally impaired at the time, and the product he sold her made her tens of thousands of dollars, so it’s a little hard to see how he could have victimized her. Not so for his prosecutors, who were representing a part of California with a large senior population and strong laws designed to make it easy to go after any kind of financial advisor acting badly. There is a reason why Neasham’s case isn’t repeating itself across the country, and it’s because not everywhere rigs the system to crush agents so easily. I am not saying Rhode Island is, but it would certainly appear that the prosecution there has turned a friendly ear to those insurance companies offended by Caramadre’s distasteful ingenuity, and have decided to make an example out of him. We saw this with life settlements; rather than admit that they built shoddy rules for themselves, insurers are trying to punish those who go through the loopholes, when what they ought to do is tighten the rules and make their products either unattractive to resell or price them in such a way that their resale ultimately benefits the insurer somehow. This is all easier said than done, but it’s a more constructive way to approach it than by going to court with all of the Caramadres of the world. Especially if those cases don’t produce wins for the industry.
I remember, when first hearing about Glenn Neasham, to having a pretty negative gut reaction to the guy and what he did, and I automatically assumed he deserved what he was getting. But he also deserved the benefit of the doubt, and the closer I looked at his case, the more convinced I was that the guy was getting done dirty by the law. The annuities business has a reputation for shady operators selling unneeded financial products to little old ladies who don’t need them. I don’t think this reputation is necessarily fair or accurate, but for those in the public who know annuities, plenty of them think of that negative stereotype. Enough agents have been caught doing enough inappropriate behavior for a prejudice to arise regarding suitability. So I can see how folks might look at a guy like Caramadre, who is so unrepentant about how he does his business, and think he’s the bad guy. But look closer. Ask yourself, is he victimizing people? Is there really a suitability issue here? Or is he taking advantage of a system that created the rules by which Caramadre is playing? And most of all, is Caramadre just a sign of things to come for the variable annuities market?
If this is a harbinger of the future of annuities, then perhaps the industry would do well to study how life settlements turned out. After so much legal and political wrangling, the industry was still left with a practice it found objectionable, but legally defensible. And what is more, it is an entire business that Alan Buerger himself says could be subverted if insurers simply paid out more on their own policies. One wonders if annuity writers could deal with the Caramadres of tomorrow simply by refining their products rather than trying to enforce against those seeking to make inventive use out of them. History would suggest so.