Life Settlements News

The NAIC's Proposed Amended Viatical Settlements Act

by Stephen L. Washington

On April 2, 2007, the Life Insurance and Annuities Committee approved extensive amendments to the National Association of Insurance Commissioner's (NAIC) Viatical Settlements Model Act. In view of the public benefit from life settlements and significant legal and public policy issues, NAIC should have acted more judiciously on a model that is more tailored to stop so-called "stranger-initiated or stranger-originated life insurance" (STOLI).

Even though the Executive Committee has not adopted the proposed amendments as of this writing, proponents have moved swiftly to introduce legislation in a handful of state legislatures that is based on the proposed amended model. Such legislation would bring significant changes in life settlement laws that would affect the availability of premium financing for life insurance to consumers. It will also significantly limit the consumers' ability of to avail themselves of life settlements, whether or not they involve premium financing.

Proponents argue that the changes are needed to curb abuses in STOLI. This assertion is not based on rigorous public policy or legal analysis, much less supported by any of the Committee's findings. STOLI is generally defined as a speculative investor's illegal manufacturing of life insurance at the inception of a policy. One thing is certain, if the amendments are enacted into law, consumers, primarily seniors, will pay the price for a problem that should be addressed by insurance carriers at policy inception using tools available under existing law.

The first time the Committee addressed STOLI publicly was at an interim meeting and public hearing on May 3, 2006. The Committee gathered testimony from life insurance carriers, life settlement participants, and other representatives. The then-chairman of the Committee offered a proposal that would prohibit consumers from transferring their life insurance policies for five years from the date of policy issuance. The proposal was to address the purported problem of STOLI. The proposal runs contrary to well-established law. Predictably, life insurance company representatives embraced the proposal, while life settlement industry participants, consumer representatives, and even some commissioners disagreed. They urged the Committee to focus on enforcing existing insurance laws instead.

The Committee held four more public hearings in 2006. At a December 10 hearing, participants were told to comment on a substantially revised draft, which the Committee circulated barely one week earlier. It raised entirely new public policy and legal issues in addition to the proposed five-year transfer restriction period. It included at least a dozen provisions that had never been discussed in any Committee meetings or circulated in any prior drafts to the working group. Like the five-year transfer ban, the Committee proposed a number of changes without explanation or justification, including the following:

¥ Requiring life settlement providers and life settlement brokers to procure a $250,000 surety bond. It must be executed and issued by an insurer that is authorized to issue surety bonds, in the relevant state, from the state or a deposit of cash, certificates of deposit, or securities, or any combination in the amount of $250,000 in lieu of professional liability insurance.

¥ Omitting an established hardship exemption for life settlements for any viator who has a significant unexpected decrease in income that impairs their reasonable ability to pay policy premiums.

The Committee refused to delay a vote during the December 10 hearing. Participants objected that the most recently proposed amendments had not been adequately considered. But, the Committee insisted that all revisions had been discussed and distributed in its public hearings, a patently untrue assertion.

Commissioners said that enough time had been spent on the proposed amended model act and that it was time take a vote. This suggests that the thorny public policy issues at hand were a burden on their schedules and did not merit further consideration. After little more than one hourÕs meeting, the Committee shut down the public comment period and voted unanimously to adopt the amendments. Without any public comment or discussion, it also voted to adopt additional amendments proposed by two insurance commissioners. These additional amendments had not been circulated publicly before the hearing.

The Making of a New Model Act: A Flawed Process

States that are considering adopting the Committee's recommended changes should understand that the process was deeply flawed from a public policy perspective. They should also be aware that certain proposed provisions are disturbingly anti-consumer and anti-competitive, a perspective that the commissioners appear to have little concern about.

First of all, the Committee did not address STOLI. It did not attempt to define STOLI or identify its distinguishing features. Nor did the Committee seek to ascertain the scope of the problem that STOLI presents or why existing laws and regulations and carrier underwriting practices are not able to address the problem.

The Committee failed to explore any other options to address STOLI. It also failed to weigh its proposals against long-established law and public policy supporting the transferability of life insurance. Instead, the Committee pursued amendments in a vacuum with single-minded purpose. The effect is to restrict the right of all life insurance policyholders to have the option of life settlements, rather than limit the solution to persons engaged in STOLI transactions.

Following the May 3 hearing, there was no substantive legal or public policy analysis or research and no meaningful debate or discussion among participants after about four hours of public meetings. Nevertheless, the Committee delivered its solution in December 2006, which failed to specifically address STOLI, much less define it. This is contrary to what its proponents want everyone to believe.

Under the proposed model, a policy procured through non-recourse premium financing cannot be settled before the fifth anniversary after policy's inception. The Committee mixed up regular life settlements with non-recourse premium financing by attaching its five-year transfer prohibition to ordinary life settlements.

Ordinary life settlements are permitted after the traditional two-year contestability period. But that is only if certain conditions are met. For instance, a life expectancy report on the insured cannot have been ordered at any time, whether or not it was done in connection with the issuance of the life insurance policy. Otherwise, the policyholder would be prohibited from transferring the policy for five years. As a result, all life settlements would be subject to a five-year transfer restriction since life expectancy reports are necessary for pricing any policy that could be subject to a life settlement.

The proposed amendments give life settlement providers and brokers new requirements to furnish information to life insurance companies. They would have to fully disclose to an insurer, in advance, a plan, transaction, or series of transactions to originate, renew, continue, or finance a life insurance policy with the insurer for engaging in a viatical settlement any time before or during the first five years after the policy was issued.

This provision has a considerably broader scope than fleshing out improper STOLI transactions. It is unclear how this provision is intended to operate with life settlement providers, which continue policies by definition. It is also unclear what statutory authority insurance commissioners intend to give life insurance carriers over life settlement providers and brokers under. The provision protects insurance carriers rather than consumers. It would permit carriers and their trade associations to collect and share information about life settlement providers and brokers and premium finance lenders. It would give carriers much greater ability (with the concomitant legal authority) to impede life settlements. The provision should have raised red flags as anti-competitive, but it did not.

As a second critique, the Committee displayed a callous disregard for the policymaking process. The Committee moved with unwarranted speed at the December 10 meeting to adopt the proposed amended act with numerous last minute amendments. The Committee only paid lip service to the formalities of public meetings. It also failed to seek out consumers to consider how the proposed model would affect seniors and others who have benefited from life settlements and premium financing.

Further, the Committee never undertook a line-by-line review of the proposed amendments or engaged in a meaningful exchange among participants

Post-Script: NCOIL

In March 2006, the National Conference of Insurance Legislators (NCOIL) met to consider its own model act concerning life settlements. NCOIL is a non-governmental organization comprised of state legislators involved in insurance legislation.

NCOIL's deliberate and balanced process stands in stark contrast to the one presented by the NAIC. NCOIL had a line-by-line review of proposed amendments, an open forum among all participants, and a working group whose members hold a broad range of views on life settlements and STOLI. While the outcome is uncertain for all parties, NCOIL's process appears to bode well for a more balanced outcome, which is to be commended.

Earlier, the organization had decided to consider revising its own model act, rather than following the NAIC's proposed amended model act. Also, NCOIL received recommended changes from all concerned parties.

At the meeting, the life committee heard testimony from insurance and life settlement representatives on key provisions presented by the NAIC's proposed model act and related matters. On the final day of the meeting, the organization's Executive Committee adopted a resolution asking the NAIC to postpone action on its viatical settlement model act until the end of the year while NCOIL considered its own model. NCOIL had hoped to have a coordinated response with the NAIC. Unfortunately, NAIC did not accepted NCOIL request.

On April 21, 2006, NCOIL's working group held an all-day meeting with representatives from the life insurance and life settlement industries to consider amendments to its model act. Action on certain significant issues was delayed for a second scheduled meeting, but there was significant progress at the meeting. The legislators expressed a strong desire to produce a revised life settlement model act to present at NCOIL's annual meeting in July.

The NAIC's Executive Committee is scheduled to meet this month to consider the proposed amended NAIC viatical settlements model act once again. If the Executive Committee adopts the proposed amendments, it is questionable whether the model will enjoy the same authority that the existing model act has had. It may be further diminished if NCOIL's carefully considered alternate model is adopted in the near future. State legislators may give NCOIL's model greater weight than a model proposed by an organization that has ignored the request of legislators to work together on a solution. If this is the outcome of the NAIC process, it will have been a lost opportunity to seek common ground on a problem that both life insurance carriers and participants in the life settlement market claim to have an interest in stopping.

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Stephen L. Washington is managing director of business development for Life Equity LLC. For more information, call 330-342-7772 x241, e-mail swashington@lifeequity.net, or visit www.lifeequity.net.