Several life settlement organizations have reacted strongly to a recent policy statement from the American Council of Life Insurers calling for a ban on the securitization of life settlements.
In life settlement securitizations, many policies are packaged together for sale to investors.
ACLI, Washington, put out a statement February 3 asserting that packaging life insurance settlements into securities raises the risk of fraud. It called for legislation or regulations prohibiting the practice altogether.
Only a limited number of insured individuals are candidates for legitimate life settlements, ACLI argued, so securitization promoters would have to build their inventories by generating illegal stranger-originated life insurance transactions.
Some securitizers could lure seniors into participating in illegal STOLI contracts, ACLI alleged. In addition, the practice encourages investors to buy life settlement-backed securities without understanding the risks involved. Uncertainty about life expectancy makes it difficult to rate the risk of life settlements, ACLI added.
Executives in the life settlement industry were quick to dispute ACLI's stand.
"Once again, ACLI has chosen to mix apples and oranges when condemning the life settlement market," said Jack Kelly, director of government affairs for the Institutional Life Markets Association, Washington.
The ACLI critique of securitization was "misplaced and incorrect," Kelly claimed.
"ACLI in the past has repeatedly acknowledged the validity of life settlements, and in its recent statement fails to distinguish between valid life settlements and the illegal origination of life insurance policies," he said. "Since ILMA's inception, it has aggressively opposed STOLI transactions and has supported legislation in all 28 states that have made such transactions illegal."
Securitization as a source of funding was "necessary to make valued insurance products available to consumers," Kelly stated.
By increasing consumers' access to sources of capital funding for their policies, securitization "will result in more competition, enabling consumers to obtain the maximum price for life insurance policies they wish to sell," Kelly stated.
Kelly did acknowledge, however, that a number of issues need to be resolved before life settlements are appropriate for securitization.
"This asset class is relatively new, with a limited record. It traditionally takes a number of years for an asset class to mature such that a securitization is viable," according to Kelly.
Russel Dorsett, director of Veris Settlement Partners, Rockville, Md., called ACLI's statement "sensationalistic nonsense."
"With all the issues public policymakers–not to mention the life industry itself–have on their plates, pushing an ill-thought-out and unnecessary proposal like this one borders on the absurd," said Dorsett, who is also president of the Life Insurance Settlement Association, Orlando, Fla.,
