The subject of enhanced cash surrender value offers (ECSVOs) made by life insurance companies in the United States during the past few years has caused a great deal of chagrin amongst those in the life settlement industry. Greg Winterton spoke to Nat Shapo, Partner at law firm Katten Muchin Rosenman, to get his views on the issue.
GW: Nat, for those who might not be too familiar with ECSVOs, tell us what they are.
NS: A few life insurers are making limited-time offers, by endorsements created many years after the creation of the policy form and the issuance of the policies, of substantially spiked cash surrender offers which are calculated by radically different methods than the benefit specification in the issued policy. They are being made on specific blocks of universal life policies, usually with secondary guarantees, for the stated purpose of inducing policy terminations.
GW: ECVSOs are a hot topic in life settlement circles, as they essentially put life insurance companies in competition with life settlement investors. Isn’t it a little disingenuous for life settlement investors to criticise competition? This is capitalism, after all.
NS: Insurance is a heavily regulated form of capitalism. Life insurers in order to be licensed must not violate the unfair discrimination prohibition and the Standard Nonforfeiture Law smoothness requirement, both of which, like all regulation, impede competition based on the legislature’s policy decision that treating like risks alike supersedes insurers’ ability to cut side deals which differ from the terms of the policies that everyone followed for years after they were issued.
Life settlement companies are licensed for a very discrete, much different purpose than life insurers. They do not group like risks together and spread and bear their risks. Instead, they pay market value for seasoned policies.
A leading life insurance executive recognized this in testimony where he explained that state insurance code “laws prohibited insurers from giving more money for a policy to a customer over another. This was where life settlements come into the picture. Life settlement companies could discriminate on the market value of the policy.”
Life settlement companies follow a slew of consumer protection laws that life insurers evade in their ECSV offers, including rescission rights, intermediary fiduciary duty, verification of consumer competence, and disclosure of competing alternatives. Each licensee should offer their own products and follow their own rules.
GW: Last year, after the NCOIL (National Council of Insurance Legislators) summer meeting, it issued a press release, declaring that ‘certain’ ECVSO’s ‘violated the standard non-forfeiture law’. That implies that there are different types of ECVSOs. What are the differences here?
NS: Life insurers have previously offered products with the same label, “enhanced cash surrender.” This is a traditional product, offered by many insurers, with completely different characteristics. There is no spike in cash surrender value many years into a seasoned policy never contemplated by the originally issued policy design.
Instead, the traditional enhanced cash surrender product featured higher cash values in earlier years to help with the accounting treatment of employee benefits. This is nothing like the ECSV products which are at issue today, which have only been offered for a few years by a few insurers.
GW: The state of Montana recently issued an Advisory Memorandum to life insurance companies, stating that ECVSOs were not compliant with some provisions of the Montana Insurance Code. Other states have done something similar. Does this mean that the risk that ECVSOs present to the life settlement market is receding?
NS: Nine states have taken some kind of action with respect to ECSVs. This includes two states who recently rescinded all four previous approvals for these products. This is good progress which we hope will spur action in more states.
GW: If you’re an end investor in a life settlement fund, what do you need to be asking your manager about the ECVSO issue? Are there any other risks that ECVSOs present to the market that they should be aware of?
NS: Once an investor owns a policy, ECSV offers do not pose a direct risk to that investment, since the investor has a contract with the insurer and can pay premiums until the death benefit can be claimed. The issue is a macro one for all stakeholders in the life settlement market—ECSVs may take policies which would be candidates for future life settlements out of commerce before the consumer is made aware that his or her asset might have a secondary market value.
Nat Shapo is a Partner at Katten Muchin Rosenman