Life insurers are beating back legislative attempts in various states by hedge funds who invest in the life settlement industry and settlement providers to keep premiums on resold life insurance policies once they have been deemed to have been fraudulently obtained.
Such a situation, called a STOLI — stranger-originated life insurance — or a policy taken out with the purpose of reselling it to a person who does not have an insurable interest in the life of the original insured.
Hedge funds who are stuck with STOLIs as part of their secondary market portfolio of life settlements want the laws rewritten so insurance companies return the premium to them, the owner of the policy, even though the policy was fraudulently obtained.
Currently, if a policy is found to be fraudulently obtained, courts have allowed life companies to keep the premium.
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States that have introduced legislation recently, in this session or last year, or may be contemplating it include Florida, South Dakota, Delaware, Connecticut and Minnesota. There were attempts last year that took the life industry in some instances by surprise, and it looks as if proponents have redoubled their efforts for the 2013 legislative sessions in some key states.
In South Dakota, the first place an attempt has surfaced this year, SB 134 was tabled, if not killed outright, earlier this month.
The issue is so important to the life industry and certain hedge funds that hold life settlement investments that they decamped to South Dakota a couple of weeks ago to participate in a hearing on SB 134.
SB 134, which did not pass, but could surface back later under the state’s legislative procedures, would allow all premiums plus interest to be recovered by the owner’s “designated representative” if a life insurance policy is deemed void or otherwise terminated or extinguished in accordance with the law for any reason other than nonpayment of premium.
“South Dakota has no STOLI laws on its books. That may explain one reason why the issue surfaced there first,” said a representative of the American Council of Life Insurers (ACLI).
Proponents of the proposed law who travelled out to South Dakota in the middle of winter, included two representatives from the hedge fund Fortress Investment Group, one from Institutional Life Markets Associations, and one from Life Equity LLC, a leading life settlement provider.
Fortress has bought hundreds of millions in the life settlement market to bolster life settlement funds in its portfolio. Overall, it reported $51.5 billion in assets under management as of Sept. 30, 2012.
Insurers and agents against the bill were represented by two lobbyists from the ACLI, one person from Prudential Life Insurance Co., one person from State Farm Insurance, local affiliates of the Independent Insurance Agents of South Dakota and one person from the National Association of Insurance and Financial Advisors (NAIFA) of South Dakota.