STOLI on the rocks (and off the docks)

The Wall Street Journal on Monday ran an interesting piece about state regulators cracking down on "middlemen" pushing Stranger-Originated Life Insurance (STOLI). The article, titled "Regulators Rein in Murky Life Policies," centered around Florida life insurance agent Steven M. Brasner, a STOLI specialist (who last year surrendered a 50-foot yacht named "STOLI on the Docks") arrested by Florida authorities in April on 22 counts of alleged grand theft, fraud and other offenses tied to $78 million of policies that earned him nearly $2 million in commissions. The article said the state accuses him of lying to insurers about applicants' financial status and their reasons for buying the coverage. Brasner has pleaded not guilty and his lawyer says he will "zealously defend" against the allegations. He is a veritable poster boy for what's wrong with STOLI, as he article goes on to say he is a defendant in civil suits filed by insurers seeking to void many of the policies, and by investors who allege they lost money buying now-worthless policies. When everything shakes out the only winners are likely to be the lawyers involved. While no one is going to defend commission-hungry rogue agents who do things like inflate unwitting senior applicants' wealth to mislead insurers into issuing multimillion-dollar policies destined to be sold in the secondary market as soon as the contestable period ends, there are considerable questions about what place the secondary market has in the industry and what lies ahead. The life settlements market could well be entering a battle for its very existence in the next few years (as argued by David Dorr in the June issue of Life Insurance Selling), and many feel like life insurance companies are fighting all life settlements under the guise of opposing STOLI. Legitimate life settlement transaction opportunities — where the policy becomes unnecessary or too burdensome for the original policyholder and that policyholder decides to sell it on the open market for the best offer instead of settling for minimal cash value or letting the policy lapse — may well disappear altogether down the road. Does STOLI have any place in the industry? Will life settlements exist in 5 years? Is it such a small market that it doesn't make a dent in the grand sceme of the life insurance business? Do we need better enforcement against fraud? I want to know what you think, and you can let me know right now via the "comment" box below. More blog entries from Brian Anderson.