The business of viatical settlements or “life settlements” as those in the business now like to refer to it, has grown immensely over the past few years. With that growth, some of those in the business see new and changing opportunities, and some of those business practices have raised the eyebrows of regulators, legislators and others in charge of protecting the public. In this commentary, former North Dakota Insurance Commissioner Jim Poolman discusses the National Association of Insurance Commissioner’s recent changes to its Viatical Settlements Model Act. Poolman’s commentary recaps events that caused the changes to the NAIC’s Model, addresses the New York case against Coventry First LLC, outlines the types of regulatory provisions that are being enacted to put STOLI on ice—such as the five-year incontestability plan and the new disclosure rules—and describes other important consumer protections relating to life settlements.

The author explains how viatical transactions were first geared to those who were afflicted with AIDS or terminal cancer and eventually started to encompass policyholders who had owned their policies for a lengthy period of time, and decided that they didn’t need those policies anymore. As it became more difficult to estimate a profit on those policies, and in view of the finite pool of consumers willing to give up policies purchased to protect families, plan estates and transition businesses, some life settlement companies turned to the manufacturing of life settlements. Poolman writes: “These 'wet paper' transactions, as they are commonly referred to, are ginned up policies with the sole intent to transfer the ownership of the policies to the investor at the time the policy is taken out. Typically the policies are sold as “free insurance” because the premiums are paid with a premium finance loan. These loans many times carry usurious interest rates, designed so that the insured would have to sign over the policy because they cannot pay back the loan to keep it.”

Poolman’s commentary also discusses other claims against life settlement carriers for attempting to potentially bilk seniors out of money on their life policies, particularly New York’s case against Coventry First LLC alleging a bid-rigging scheme in which Coventry paid off other life settlement companies and brokers to not bid on policies so that Coventry could pay the policyholders less for their policies and, therefore, increase the profit to the company.

The commentary further outlines the key points of the NAIC’s model act relating to viatical settlements, including the narrowly crafted five-year moratorium period (and its exceptions) as well as the disclosure requirements relating to offers involving proposed viatical settlement contracts and the amount and method of calculating a broker’s compensation.

Poolman also provides a unique insiders’ perspective on the reaction of the life settlement industry to these regulatory developments. The author writes: “It should come as no surprise that the Life Insurance Settlement Association vociferously opposed these two provisions, as there is certainly a motive to protect the secrecy of the compensation paid to the brokers in these transactions. Regulators felt very strongly that these important consumer protection provisions needed to remain.”

Poolman also considers some of the other important consumer protection provisions in the NAIC model, including the “free-look” period and bonding requirements.

Poolman also addresses the competing concerns as between the life insurance industry (which wanted a stricter regulation as it perceives life settlement and STOLI transactions as a perversion of its products), the life settlement industry (which wanted very little or no regulation while claiming to advocate for ‘responsible’ regulation) and the regulators and lawmakers charged with balancing these competing concerns while serving what they perceived as the best interests of consumers and the marketplace.

The author concludes: “One thing is for sure, the NAIC action has spurred legislators, regulators and the public to have a discussion about investors owning a life insurance policy on someone they don’t even know. It has created a debate about the proper consumer protections, the moral hazards of such a practice, and how this marketplace changes the face of the life insurance industry. I am confident this will not be the end of the debate as settlement companies will come up with new and creative ways to market their products, and consumers will need to continue to be protected from new schemes.”

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