As life settlements become more a part of the mainstream of the insurance marketplace, those involved in settlements are undergoing the same sorts of procedures as their counterparts in the primary market, including market conduct examinations by state regulators.
Kathleen Birrane, senior vice president and general counsel for Maple Life Financial in Bethesda, Md., noted that "most states regulate the viatical sale for the consumer." Some states only regulate "true viaticals," she added, where the seller meets certain criteria such as having a terminal illness or specific life expectancy, while a smaller number regulate all life settlement transactions.
In examining companies' regulated transactions, she said "they want to make sure all the critical parties are licensed," which includes the life settlement provider and the life settlement broker, and that all of the state requirements have been met. These, she said, can involve ensuring that the proper forms have been used, the proper disclosures have been made and, for some states, issues regarding compensation.
John McCarroll, vice president and general counsel for Q Capital Strategies in New York, added that examiners will also look at aspects of the business such as escrow procedures to ensure that the viators are promptly paid in the transactions.
Market conduct compliance, Birrane noted, is a part of doing business in the insurance world. Anyone licensed by a state regulator "has to be aware that, at any point, you are subject to having to provide state regulators with information about your participation" in the state's market.
There are, however, two distinct forms that requirement can take, she noted, as either a full market conduct examination or a less formal inquiry by state regulators. "It could be in response to a consumer complaint, or even just a question" from a regulator, she said.
What makes a full market conduct exam different is that there is a "very specialized process" that states undertake, Birrane said, and it is a "uniform process throughout the states" covered by a handbook produced by the National Association of Insurance Commissioners. That guidebook sets out the rules for examining insurance companies or producers, she explained, and life settlement firms may be included either as "ancillary" companies, or they may be dealt with by the state's specific life settlement act. "Every state's a little bit different in terms of how detailed they are."
While the regulations governing life settlements among states may vary in general, McCarroll said the content of a market conduct examination is "fairly similar in every state." Many of the issues for conduct, he added, are effectively the same. McCarroll said every regulator will want to ensure that case files are fully documented. "They're very into case files," he said. "All that would be consistent in every state," although he cautioned again that "there could be a particular issue" in which a specific state examiner might be interested.
"In general, compliance issues are pretty consistent across the board," he said.
The process, however, is fairly straightforward. The state will issue a letter to the company outlining what it wants to look at and for what period of time. The regulators will typically want to look at files for a specific time period, Birrane noted, generally for one year, as well as a sampling of other files to ensure that they are compliant with state rules. Additionally, she said, "they want to make sure you have policies and procedures that show you are complaint with state law" in terms of how data is kept secure and what access employees have to that information.
McCarroll also noted that the specific regulations governing life settlements vary between states and that it "depends on the state" in terms of how and when an examination occurs.
"Every state reserves the right" to examine a company, he said, but actual examinations may not occur in any given year. As an example, he noted that Q Capital Strategies began obtaining licenses 3 years ago and is currently licensed in 23 states with more expected, and has only been subject to one market conduct exam. While again noting that every state reserves the right to conduct an exam, he said that "some states are more proactive."
