The litigation involving so-called "death bets" in the secondary market for life insurance policies may decrease in volume going forward, with settlements in cases where the premium is at stake, but regulators are geared to be more vigilant for annuity scams, which are harder to address with state-based stranger-originated life insurance legislation, some in the life insurance industry say.
As the Wall Street Journal recently reported, Phoenix Cos. and other life insurers are being sued by investors after policies resold during the boom years didn't pan out as original policyholders lived longer than their evaluations had suggested. Investors left holding the bag are going after insurers for benefits and premiums.
David McDowell, a seasoned litigator representing insurers like Phoenix from the Texas-based Edison, McDowell & Hetherington noted that "you're not going to see the volume you have seen…, not the volume of the last two or three years," as insures are identifying the policies on their books.
Insurance companies don't want to give money back, so the question will turn to dividing premium repayments among those parties that want to settle. Where the death benefit is great, and the stakes are high – "that's when you are going to see people going to the mat," McDowell said. He pointed to a high-profile case in the 8th Circuit where it took a long time to get the parties to walk away from a $10 million fight over the premium comp.
STOLI model laws are on the books in about 30 states, aiming to prevent scams by instituting a five-year moratorium on the resale of life policies. Hawaii's law is sunsetting, however, and key states like Texas, Florida, Massachusetts and Michigan have not yet taken definitive action.
Bruce Ferguson, ACLI senior vice president, state relations, noted the ACLI will be undertaking an outreach effort with the new policymakers and regulators in states that haven't passed STOLI legislation.
"The NAIC model law addresses STOLI in a rifle-shot way," Ferguson claimed, targeting certain transactions that merely have the characteristics of STOLI. The ACLI instead supports the NCOIL (state legislators) model, which defines and prohibits STOLI.
The life settlement industry, meanwhile, has cried foul. Doug Head, former executive director of the Life Insurance Settlement Association [LISA], has testified before the NAIC that insurers are merely anti-life settlement industry.
"We are concerned that the illegal and illegitimate sales of annuities will be used as a "Trojan horse" and serve as the launching pad for baseless attacks on both the life settlement industry and the lawful ability of life insurance and annuity owners to sell their contracts and to receive the best value for their assets on an open and competitive market," Head said.
Stranger originated/owned annuities (STOAs) target seniors and terminally ill patients by persuading them to purchase a variable annuity largely for the death benefit to be reaped by investors or intermediaries.
Former Connecticut Insurance Commissioner Thomas Sullivan has stated "unfortunately, there is no way of knowing the full magnitude of this problem, but regulators are taking a diligent look at the conditions surrounding these sales and practices."
Indeed, regulators at NAIC committee meetings are advising insurance companies put safeguards in place to prevent or limit their exposure to stranger-originated annuity transactions and coming up with guidance on the matter. Some of the draft guidance includes reviewing chargeback policies to ensure agent commissions are adjusted if a policy is annuitized within the first year of the contract, creating detection methods to identify agents who may be involved in the facilitation of stranger-originated annuity transaction and reviewing all annuity applications to ensure specific questions are posed with regard to an annuitant's health status and the manner in which the contract is being funded. Of course, as insurance industry professionals note, annuities are categorized differently in different states, and may not fall under the STOLI insurance laws if they are not designated as an insurance product. Seller, beware.
