This month marks the 25th anniversary of the adoption of the National Council of Insurance Legislators’ (NCOIL) Life Settlements Model Act (LSMA) – one of the two model acts (the NAIC’s Viatical Settlements Model Act being the other) that determines the regulatory landscape of the life settlement industry’s secondary market.
Originally adopted on 17th November 2000, the LSMA was created to protect policyholders and sets regulatory criteria across a wide range of categories, from licensing requirements to prohibited practices, from disclosures to fraud prevention, from advertising to reporting requirements and much more.
While the LSMA is, by definition, a model act, with no actual legislative power, getting amendments to it is important for the life settlement market because standardising the regulatory environment reduces operational friction across states, reducing time and money costs, which can ultimately be redeployed into increasing the supply of eligible policies into the market.
Amendments are rare – only three times in the past two-plus decades, indeed – but the most recent update came in November last year (after being postponed twice, first in April and then in July, as negotiations between the life settlement market and the life insurance industry went back and forth about two proposed amendments from industry group the Life Insurance Settlement Association (LISA)).
The one that eventually passed relates to the requiring of insurers to accept electronic or facsimile requests for verification of coverage and to send confirmation of change of ownership or beneficiary via electronic means. Remarkably, some carriers in the market were – and still are, according to anecdotal evidence – using snail mail for certain document exchanges, and despite the fact that this may seem bewildering to those outside the life settlement market, the passing of the resolution will make a difference.
“The carriers provide different levels of cooperation. Some have no issue with e-signatures, but some are resistant. That’s partly because of the way they have always done things and partly because it’s life settlements,” said Alan Buerger, Co-Founder and Executive Chairman of Coventry (and who frequently represents LISA in negotiations with NCOIL and life insurance group the American Council of Life Insurers (ACLI)).
“We wanted to get carriers to operate more consistently, with good practices, regardless of their antipathy to life settlements.”
The other amendment didn’t pass, however. LISA didn’t get approval for its request to make it unlawful for an insurer to prohibit a life insurance producer or broker from disclosing to a client the availability of a life settlement contract.
“We made a judgement call that because we got agreement with the ACLI on the electronic communications issue, we could then say to NCOILs committee that the carriers agree, which made it more likely that the amendment would pass so we backed down on the prohibition issue. This was still absolutely a win for our industry,” said Buerger.
Bryan Nicholson, Executive Director at LISA, agrees.
“Transacting in the life settlement market is a complex process because of the substantial regulatory requirements attached to each transaction – which are designed to protect consumers. While it’s likely that the process will never be instant, that doesn’t mean that it can’t be improved. Over the years, many of our members have expressed frustration on behalf of the policyholder that the process was too lengthy, so we’re pleased that this amendment passed last time,” he said.
So, a win and a loss – for now – for the life settlement market in the most recent round of negotiations. But the industry has benefitted from other previous regulatory developments. 2007 was arguably a banner year for the life settlement market, for two reasons.
First were the amendments to the LSMA specifically to combat the growing practice of STOLI (Stranger-Originated Life Insurance). STOLI schemes involve life insurance origination with the primary intent of selling them for a profit, which regulators viewed at the time – and still do – as an attempt to circumvent insurable interest laws.
This amendment protected not only consumers and life insurers, but arguably the life settlement market itself, as litigation risk on insurable interest grounds fell, meaning that asset managers of life settlement portfolios and their clients – large institutional investors who demand legal certainty and predictable returns – received a greater degree of comfort.
Second was the amendment to allow licensed life insurance agents to obtain a separate license as a life settlement broker. For agents, this was beneficial because it allowed agents to better serve their clients by providing a crucial, valuable alternative to simply lapsing or surrendering a policy for low cash value and it created a new, regulated source of compensation for agents who help clients liquidate an asset they no longer need. Before the amendment, this path was often unclear or prohibited.
“The amendment to identify and prohibit STOLI was a significant development for the life settlement market because it tightened up the definition of STOLI so that it was clear not only what it was but just as importantly for us, what it wasn’t. It provided a lot of clarity for all participants in our market,” said Buerger.
“Although by far the most beneficial was the enabling of insurance agents or producers to advise their clients and get compensated for doing so with regards to life settlements. At the time, there were strong views on the part of the carriers and some participants in the industry to not allow this; it was the big fight at the time.”
While there is no rule that is set in stone with regards to when the LSMA will come up for re-adoption again, history tells us that it is every five years or so. That means the life settlement industry has four years to figure out what it wants to try and amend next time; the significant lag from model act change to state legislation enactment means that the e-signature amendment will have only recently been in full force to any significant extent (unless insurers decide to be pro-active, of course).
And while Buerger wants to revisit the recent knock-back with regards to the desire to make it unlawful for an insurer to prohibit a life insurance producer or broker from disclosing to a client the availability of a life settlement contract – “We will resurrect that,” he said – ultimately, securing beneficial regulatory change is only one pillar out of many that the life settlement market needs to influence in order to grow significantly.
“The thing that is most important is education. I’m pleased that the industry – providers, brokers, etc. – have been much more aggressive over the last several years in educating insurance marketing organisations, financial advisors, etc. There has been much more of a concerted effort among the participants,” he said.
“A large number of the players are very active digitally which has generated more consumer awareness. At the same time, we’re adversely affected as an industry when there is bad PR as a result of litigation or investors not doing as well as they would like or expect they should. Ours is an industry where it’s a pendulum; one side is the flow of capital, and the flip side is the flow of policies. In order to increase both we have to be relentless in educating our stakeholders, not just pushing for regulatory change.”