[Senate Hearing 111-95]
[From the U.S. Government Publishing Office]


                                                         S. Hrg. 111-95
 
  BETTING ON DEATH IN THE LIFE SETTLEMENT MARKET: WHAT'S AT STAKE FOR 
                                SENIORS? 

=======================================================================

                                HEARING

                               before the

                       SPECIAL COMMITTEE ON AGING
                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               ----------                              

                             WASHINGTON, DC

                               ----------                              

                             APRIL 29, 2009

                               ----------                              

                            Serial No. 111-4





         Printed for the use of the Special Committee on Aging















  Betting on Death in the Life Settlement Market: What's At Stake for 
                                Seniors?
















                                                         S. Hrg. 111-95

  BETTING ON DEATH IN THE LIFE SETTLEMENT MARKET: WHAT'S AT STAKE FOR 
                                SENIORS?

=======================================================================

                                HEARING

                               before the

                       SPECIAL COMMITTEE ON AGING
                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             WASHINGTON, DC

                               __________

                             APRIL 29, 2009

                               __________

                            Serial No. 111-4

         Printed for the use of the Special Committee on Aging



  Available via the World Wide Web: http://www.gpoaccess.gov/congress/
                               index.html

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                         U.S. GOVERNMENT PRINTING OFFICE 

51-547 PDF                       WASHINGTON : 2009 

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Washington, DC 20402-0001 








                       SPECIAL COMMITTEE ON AGING

                     HERB KOHL, Wisconsin, Chairman
RON WYDEN, Oregon                    MEL MARTINEZ, Florida
BLANCHE L. LINCOLN, Arkansas         RICHARD SHELBY, Alabama
EVAN BAYH, Indiana                   SUSAN COLLINS, Maine
BILL NELSON, Florida                 BOB CORKER, Tennessee
ROBERT P. CASEY, Jr., Pennsylvania   ORRIN HATCH, Utah
CLAIRE McCASKILL, Missouri           SAM BROWNBACK, Kansas
SHELDON WHITEHOUSE, Rhode Island     LINDSEY GRAHAM, South Carolina
MARK UDALL, Colorado
KIRSTEN GILLIBRAND, New York
MICHAEL BENNET, Colorado
ARLEN SPECTER, Pennsylvania
                 Debra Whitman, Majority Staff Director
             Michael Bassett, Ranking Member Staff Director

                                  (ii)

  













                            C O N T E N T S

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                                                                   Page
Opening Statement of Senator Herb Kohl...........................     1
Statement of Senator Mel Martinez................................     3

                                Panel I

Statement of Stephan Leimberg, CEO, Leimberg Information 
  Services, Inc., Havertown, PA..................................     4
Statement of Mary Beth Senkewicz, Deputy Commissioner, Life and 
  Health Insurance, Florida Office of Insurance Regulation, 
  Tallahassee, FL................................................    17
Statement of Michael McRaith, Director, Division of Insurance, 
  Illinois Department of Financial and Professional Regulation, 
  Chicago, IL....................................................    33
Statement of Fred Joseph, Commissioner, Division of Securities, 
  Colorado Department of Regulatory Agencies, Denver, CO.........    47

                                Panel II

Statement of James Avery, Jr., President, Individual Life for 
  Prudential Financial, Newark, NJ...............................    65
Statement of Scott Peden, President, Life Partners, Incorporated, 
  Waco, TX.......................................................    78
Statement of Michael Freedman, Senior Vice President, Government 
  Affairs, Coventry, Fort Washington, PA.........................    87

                                APPENDIX

Mary Beth Senkewicz, Florida Office of Insurance Regulation 
  Response to Senator Specter's Question.........................   105
James Avery, ACLI Response to Senator Specter's Question.........   105
Summary of Committee Investigations submitted by the Aging 
  Committee Majority Staff.......................................   107
Additional information from Coventry.............................   118
Additional information from Mary Beth Senkewicz, Office of 
  Insurance Regulation...........................................   140
Letter and additional information from the State of Wisconsin, 
  Office of the Commissioner of Insurance........................   189
Letter from the National Conference of Insurance Legislators.....   194
Letter from the Life Insurance Settlement Association............   196
Letter from the Association for Advanced Life Underwriting.......   209
Statement from The National Association of Insurance and 
  Financial Advisors (NAIFA).....................................   211
Testimony of Mary Jo Hudson, Director of the Ohio Department of 
  Insurance......................................................   215
Statement of Joseph M. Belth, Professor Emeritus of Insurance in 
  the Kelley School of Business at Indiana University............   225
Testimony submitted by the State of New York Insurance Department   230

                                 (iii)

  


  BETTING ON DEATH IN THE LIFE SETTLEMENT MARKET: WHAT'S AT STAKE FOR 
                                SENIORS?

                              ----------                              --



                       WEDNESDAY, APRIL 29, 2009

                                       U.S. Senate,
                                Special Committee on Aging,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 2:09 p.m. in room 
SD-106, Dirksen Senate Office Building, Hon. Herb Kohl 
(chairman of the committee) presiding.
    Present: Senators Kohl [presiding], Udall, and Martinez.

        OPENING STATEMENT OF SENATOR HERB KOHL, CHAIRMAN

    The Chairman. Good afternoon to everybody, and thank you 
very much for coming to this hearing this afternoon.
    In today's tough economic climate, millions of seniors have 
lost a big part of their retirement and investments in only a 
matter of months. Unlike younger Americans, they do not have 
time to wait for the markets to rebound in order to recoup a 
lifetime of savings.
    For many, this means postponing retirement, or even 
returning to work in a difficult employment market, often 
staked against older workers. Needless to say, seniors are 
looking for ways to bolster their sagging savings.
    Often they find that the most valuable asset they can 
afford to part with is their life insurance policy, which can 
have substantial cash value. New alternatives have become 
available for those who no longer have a need for their life 
insurance policy.
    One of them is the life settlement business, a burgeoning, 
multi-billion dollar industry that has exploded in recent 
years. Life settlements can be a worthy alternative for seniors 
who are considering the sale of their life insurance policy, 
and offer a higher payment in the cash surrender value offered 
by the insurance company.
    Today, we're here to inform seniors that selling one's life 
insurance policy is a complex transaction that can be filled 
with hidden pitfalls.
    Over the last 9 months, Committee staff interviewed many 
honest and competent players in this industry. But as with any 
industry that balloons over a short period of time, there are 
sales practices and regulatory loopholes that need to be 
examined in the interest of seniors and consumers, at large.
    Several State regulators are here to talk about the sales 
and marketing abuses that they have seen at the hands of life 
settlement brokers, who--in some cases--received huge 
commissions.
    Many States, including my own State of Wisconsin, are 
working to implement legislation, or State regulations that 
would institute consumer safeguards. Initiatives include a 
requirement that brokers be licensed to sell life settlements, 
the establishment of guidelines for sales, marketing and 
promotional materials, and the mandatory disclosure of certain 
risks.
    For example, most seniors do not know that when they sell 
their policy, their health records can be passed off to 
multiple third parties as their policy is resold, time and 
again.
    Most seniors are also unaware of what their tax liabilities 
are, or that they may be uninsurable in the future. 
Furthermore, most seniors may not know that they are 
participating in insurance fraud if they purchase life 
insurance with the intent of flipping it for a life settlement.
    Known as ``stranger-originated life insurance,'' or STOLI, 
such scams have led to a spike in litigation since 2005. In 
Florida alone, insurers have filed three multi-million dollar 
Federal lawsuits in the past year, alleging that the true 
nature of the life insurance transactions were misrepresented.
    We'll also examine how life settlements are being bundled, 
and sometimes used as risky investments by some of America's 
largest investment companies.
    We'll hear about the risks associated with purchasing 
investments backed by life settlements, and explain why they 
are not generally considered suitable for non-institutional 
investors.
    As States struggle to increase regulations and consumer 
protections, it's crucial that the Federal role is made clear. 
I've sent a letter to the IRS, asking them to clarify the Tax 
Code with respect to life settlements, as the current lack of 
guidance may be creating loopholes. In a reply, Treasury 
Secretary Geigner stated that the Agency will soon publish tax 
guidance for people who sell their policies, and the investors 
who purchase them.
    We've also asked the Securities and Exchange Commission to 
state its position on whether life settlement investments 
should be considered securities, as most State regulators are 
treating them. Mary Shapiro, Chairman of the SEC, responded 
last night and clarified the SEC's jurisdiction over most 
aspects of life settlement transactions. She also assured us 
that they will look into the regulation of life investment 
brokers.
    Finally, we've asked the Government Accountability Office 
to study the current size and scope of the life settlement 
market, and take a look at related consumer issues, as it's 
clear that the industry is in need of more transparency and 
regulation, and we may be introducing legislation to address 
this issue.
    We thank you once again for being here today, we thank our 
witnesses for being here today. We now turn to Ranking Member 
Mel Martinez, for his opening statement.

       STATEMENT OF SENATOR MEL MARTINEZ, RANKING MEMBER

    Senator Martinez. Chairman, thank you very much, and thank 
you for calling this very, very important and timely hearing.
    In today's turbulent economic environment, we want to 
preserve and protect seniors' assets and their liquidity 
options, as well.
    We also want to ensure that primary and secondary financial 
markets are safe, transparent, efficiently regulated, and 
inspire investor confidence.
    I'd like to thank our panelists for joining us today to 
discuss issues impacting those contemplating a transaction 
involving life settlement firms. I'm also looking forward to 
hearing what States are doing to bolster investor protection in 
the wake of several life settlement firms being exposed as 
fraud schemes.
    It is my hope that we can bring greater attention to 
matters regulated by the States, to ensure both investor, and 
consumer, protection.
    We'll also hear today from two firms engaged in the 
business of life settlements, and what they envision for their 
future, and the future of their industry. Speaking of what 
steps Congress, the States and regulators can contemplate to 
ensure consumers are fully appraised of their rights, and their 
obligations under such transactions.
    Also important to this committee is a complete discharge of 
fiduciary duties on the part of brokers and providers.
    Seniors should have comfort that they're receiving the best 
value for their assets, and this opaque life settlement market. 
They also deserve full accountability and transparency when 
engaging in these types of transactions, and we will be 
monitoring practices as we go forward.
    Businesses practices, such as stranger-originated life 
insurance policies--or STOLIs, as mentioned by the Chairman--in 
my view are contrary to the fundamental precepts of the 
insurance market, and we would appreciate more on how to 
prevent these types of transactions.
    We also need to learn the real-world task practices 
surrounding these life settlement transactions, including the 
gains on sale, the taxability of the death benefits, and the 
fair and equitable treatment of all tax filers.
    Mr. Chairman, I want to ensure that those with a tax 
liability as a result of one of these transactions, No. 1, pays 
all of the taxes that they owe, and No. 2, that they be treated 
consistently, without regard to who prepared their return. In 
other words, I'd like to see a strong guidance from the IRS, 
and appropriate clarification, so that there is no ambiguities 
as to who owes what at what time.
    I look forward to learning more from today's witnesses, and 
thank them all for appearing here with us today. Thank you.
    The Chairman. Thank you, Senator Martinez.
    We'd like now to introduce the members of our panel.
    Our first witness on the first panel today will be Stephan 
Leimberg, CEO of Leimberg Information Services, which does 
provide analysis and commentary for financial services 
professionals. He is also CEO of an estate and financial 
planning software company. Mr. Leimberg has written and 
lectured extensively on the topic of life settlements, premium 
financing, and stranger-owned life insurance.
    Welcome.
    Our next witness will be Mary Beth Senkewicz, the Deputy 
Commissioner of Life and Health of Florida's Office of 
Insurance Regulation. Ms. Senkewicz formerly served as Senior 
Health Policy Counsel, and Legislative Advisor to the National 
Association of Insurance Commissioners for over 11 years. She 
received her law degree from St. John's University in New York 
City.
    Next we'll be hearing from Michael McRaith, the Illinois 
Director of Insurance. Mr. McRaith has led several high-profile 
insurance fraud investigations for the State of Illinois. He 
belongs to the National Association of Insurance Commissioners 
Senior Issues Task Force, and has testified before numerous 
Congressional committees on insurance-related topics, including 
marketing and sales abuses by Medicare Advantage, and 
prescription drug plans.
    Finally, we'll be hearing--on the first panel--from Fred 
Joseph, the Securities Commissioner for the State of Colorado. 
Mr. Joseph oversees the regulatory agency that licenses stock 
brokers, brokerage firms, and investment advisors in Colorado. 
He's also President of the North American Securities 
Administrators Association, whose mission is to protect 
consumers who purchase securities, or investment advice.
    So, we welcome you all here today and we'd be delighted to 
take your testimony at this time.
    Mr. Leimberg.

   STATEMENT OF STEPHAN LEIMBERG, CEO, LEIMBERG INFORMATION 
      SERVICES, INC., BRYN MAWR, PA AND AMELIA ISLAND, FL

    Mr. Leimberg. Legitimate, appropriate life settlements can 
benefit seniors. But I've been asked to discuss abuses. Here 
are six.
    First, no State requires a holdfold analysis. There's no 
mandatory testing to see if a seller should ``hold''--that is, 
keep, or ``fold''--that is, sell a policy. Without analysis, 
existing life insurance may be stripped away from a family when 
it should be kept.
    Second, rogue brokers, unscrupulous settlement companies 
rig bidding on policies. Sellers are cheated.
    Third, few States have modern settlement laws--it's 
patchwork. Laws aren't close to being uniform. So, rogue 
brokers change the legal location of a transaction to avoid a 
tough State's laws. They move it to a lesser-regulated State, 
or to one with no law. Forty-two percent of all 2008 
settlements were in States with no settlement law.
    Fourth, disclosure. State regulators don't have authority 
to require needed information on settlement companies' 
ownership, operations, conduct, security, and any fraud 
procedures. Regulators have even been sued by big settlement 
companies who bully them from obtaining information essential 
to protecting seniors.
    Fifth, no State--let me repeat--no State specifically 
restricts who can buy an existing policy on a senior's life. 
Once it's sold, you have no say, no veto. There are no limits 
on how many times a policy can be resold, or to whom. You'll 
never know who will own the policy on your life. No State has a 
staff that monitors buyers. So, you'll never be sure that the 
contract on your life will not end up in the wrong hands.
    Sixth, stranger-originated life insurance--STOLI. STOLI is 
a bet by strangers, a wager on how soon someone will die. 
Strangers can't legally buy insurance on a person's life, so 
like a teenager who finds and pays a homeless person to buy 
liquor, speculators line up, pay, and co-op seniors into lies 
and misrepresentations. The intent? Trick insurers into 
thinking the insurance is for the senior's family.
    STOLI has already resulted in higher rates, stopped some 
insurers from issuing policies to seniors at all, and encourage 
seniors to aid and abet fraud. Unsavory settlement companies, 
more clever than ethical, enable STOLI by lobbying legislators 
to water down laws. Loopholes are inserted on the cynical 
pretense of defending property rights. Whose property rights? 
The very people co-opted into committing fraud to get the 
policy.
    What's needed? No. 1, make a holdfold analysis mandatory. 
Require brokers to explain the advantages of keeping insurance. 
Require them to show sellers how much insurance is still 
needed. How can you make an informed decision that existing 
insurance is not needed, and should be sold, if no analysis has 
been performed? Require brokers to explain, in writing, 
alternatives to a sale.
    Second, demand transparency. Require brokers to disclose 
all offers, require them to shop and show spreadsheet offers 
from potential buyers. Sellers should be shown who was offered 
their policy--let them see for themselves if the policy was 
shopped competitively. Provide sellers a written statement, not 
only of what they net, but what the other parties get, so they 
can know if they're being taken advantage of. Require 
settlement companies to provide more information to regulators, 
not less.
    Third, forbid individuals from buying policies. Restrict 
the types of institutions that can buy policies, and monitor 
them.
    Fourth, mandate licensing and rigorous continuing 
education.
    Fifth, enact modern and more uniform settlement laws. 
Prevent predators from taking transactions to States that let 
them do whatever they want to do .
    Six, give regulators broad examination and investigation 
powers. Enable them, and empower them, to seek injunctions, 
cease and desist orders, and impose meaningful fines and 
criminal fraud penalties.
    Seventh, stop STOLI. Use laws such as Iowa's, North 
Dakota's, the laws that are proposed in Oregon.
    My conclusion: insightful, effective law can't wait. Why 
not? Because what is at stake is not merely a senior's money. 
You can not--you must not--forget, we're talking about a wager, 
a bet on a human's life. The sooner the insured dies, the 
greater the investor's profits. If it is your responsibility to 
develop, monitor, and enforce settlement laws, remember a 
senior's life is, literally, in your hands.
    [The prepared statement of Mr. Leimberg follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    The Chairman. Thank you.
    Ms. Senkewicz.

STATEMENT OF MARY BETH SENKEWICZ, DEPUTY COMMISSIONER, LIFE AND 
   HEALTH INSURANCE, FLORIDA OFFICE OF INSURANCE REGULATION, 
                        TALLAHASSEE, FL

    Ms. Senkewicz. Thank you, Mr. Chairman. Good afternoon, and 
good afternoon Ranking Member Martinez, from the great State of 
Florida.
    My name is Mary Beth Senkewicz, I am the Deputy Insurance 
Commissioner for the Florida Office of Insurance Regulation, 
and on behalf of Commission Kevin McCarty and myself, I would 
like to thank you for inviting me to discuss the life 
settlement industry.
    To begin with, there is nothing inherently wrong with life 
settlements in and of themselves. It is well-settled law that 
insureds have a legitimate property right in their properly 
obtained life insurance.
    In fact, the industry began with a noble purpose. The first 
phase of these products began in the 1980's and were marketed 
to AIDS patients who needed cash to defray medical expenses, 
and gain access to life-prolonging drugs. The problem now is 
the lack of transparency associated with these transactions.
    For example, in Florida, the industry opposed a proposal 
that would require a disclosure of all fees, including 
commissions associated with the transaction. Another general 
problem is that persons wanting to sell their policies have no 
easy way of knowing if they are getting the best deal they can.
    Our office has expended a tremendous amount of resources 
regulating this industry. To put it into perspective, Florida 
has issued licenses to 24 entities, which is now only 14 
entities, due to revocations and surrendered licenses.
    Since 1996, the industry has incurred 18 different legal 
orders, 2 administrative complaints, and 11 examinations or 
investigations resulting in additional consent orders, all with 
accompanying fines and costs of $1.95 million. This is 
especially egregious when considering this industry represents 
only 14 of the 3,900 entities regulated by our office. Every 
time we try to insert some transparency into the system, such 
as the bill we proposed for the 2009 legislation to consider, 
the industry fights us. We have also been sued several times 
when we try to enhance transparency by rule.
    Coventry First, LLC is a leader in this industry. After the 
State of New York sued Coventry, accusing the company of bid-
rigging and other fraud in acquiring more than $3.6 billion 
worth of life insurance policies, we conducted our own 
investigation.
    We then issued a Notice and Order to Show Cause, alleging 
violations of the Florida insurance code, including using 
fraudulent and dishonest practices, transacting business in bad 
faith, and employing individuals shown to be untrustworthy or 
dishonest.
    Coventry denied the allegations, but ultimately entered 
into a consent order agreeing to pay $1.5 million. Thereafter, 
the Office notified Coventry of a follow-up examination. 
Coventry moved for a preliminary injunction in Federal district 
court, arguing that our office does not have the authority to 
examine its policies that relate to violators who reside 
outside of Florida.
    On March 31, 2009, the Federal Court ruled in our favor, 
explicitly recognizing the State of Florida's rights to examine 
all of Coventry's books and records in order to evaluate its 
business practices as a whole. Coventry has appealed that 
decision.
    The newest development is called stranger-originated life 
insurance, or STOLIs. These transactions involve private 
investors soliciting elderly persons before they purchase a 
life insurance product. These promoters entice seniors to buy 
life insurance they might not otherwise have purchased. The 
motivation for seniors is not to access funds, but to profit on 
their ability to buy life insurance.
    But these transactions may harm seniors--they may exhaust 
their life insurance purchasing capability, and the cash 
payments for selling their policy might subject them to an 
unexpected tax liability. Seniors may also have to give the 
investor, and subsequent investors down the line, access to 
their confidential medical records.
    In conclusion, generally speaking, the life settlement 
industry needs far more transparency than it currently 
possesses. In particular, STOLIs provide little public benefit, 
or satisfy any legitimate financial need in the marketplace. 
These transactions exist solely to manufacture life insurance 
policies for profit. Those transactions can expose seniors to 
potential tax liabilities, policy rescissions, and traumatic 
litigation. These transactions subvert the original purpose of 
life insurance.
    Thank you.
    [The prepared statement of Ms. Senkewicz follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    The Chairman. Thank you, Ms. Senkewicz.
    Mr. McRaith.

STATEMENT OF MICHAEL MCRAITH, DIRECTOR, DIVISION OF INSURANCE, 
 ILLINOIS DEPARTMENT OF FINANCIAL AND PROFESSIONAL REGULATION, 
                          CHICAGO, IL

    Mr. McRaith. Chairman Kohl, Ranking Member Martinez, 
committee staff, thank you for inviting me to testify today. 
I'm Michael McRaith, Director of Insurance in the State of 
Illinois, and I speak today in that capacity.
    I congratulate this committee and the staff for focusing on 
the plight of our aging friends and neighbors who may fall prey 
to abusive life settlement practices. In 2007, Illinois had 
more than 6.9 million individual life policies in force, and 
nearly 197,000 group policies, accounting for more than 5 
million individual certificates.
    For us, the importance of life settlement regulation and 
transparency can not be overstated. Some argue that life 
settlement regulation illustrates a pro-insurance industry 
bias. This is false. It is not one industry versus another, the 
issue is consumer protection.
    To be clear, life settlements can be beneficial to 
individuals whose circumstances have changed, perhaps through 
divorce or terminal illness. When evaluating sales and 
marketing practices, our discussion must account for the 
retiree who worked hard, raised a family, saved whatever 
possible, but is not legally or financially sophisticated.
    With postponed retirements and depleted portfolios, and 
often with few employment options, our seniors need protection. 
Unwitting seniors may seek income through a stranger-owned life 
insurance scheme that imposes unexpected taxes, or lost public 
benefits.
    In Illinois, residents age 55 to 85 were invited to meet 
Mike Ditka, and learn why Wall Street wants to buy your 
annuity. Is there such a thing as free insurance? Are you in 
danger of outliving your life insurance? Ads like this prove 
that life settlements involve more than just the rich and the 
extremely wealthy.
    Our Department supervises any individual or entity involved 
with the business of insurance. Late in 2007, we subpoenaed 
records from Coventry First, so we could understand how the 
industry operates within our borders.
    Coventry filed suit to quash the subpoena arguing that it, 
Coventry, is beyond our regulatory reach. We prevailed at the 
trial court, and the suit is now on appeal.
    In Illinois, for 17 months, we have labored through 
legislative negotiations with the insurance and life settlement 
industries. Our legislators have been Herculean in bringing 
Illinois to the brink of regulation that includes a hybrid of 
the best practices from the NAIC model law, and other States.
    But we know Illinois law can not be molded to endorse, 
implicitly, the life settlement business model, because too 
much remains a mystery. Clearly, stranger-owned life insurance, 
or STOLI, violates a fundamental policy, premised on the tenant 
that a stranger should not want you to die. Our lives, 
regardless of age, should not be commoditized, packaged, and 
traded on Wall Street, like credit default swaps.
    All responsible parties agree, STOLI should be banned. But 
as States, and as a nation, we lack answers to important 
questions, including who are the sources of capital for life 
settlements? What are the payment arrangements between the 
commercial parties? What are the roles and compensation for 
brokers, solicitors, promoters? Who are the life settlement 
consumers, and most importantly, what has been--or is--the 
impact of a life settlement on those individuals or their 
families?
    We regulate to protect consumers. That regulation must 
include measures to reduce the opaque hieroglyphics of the life 
settlement industry. With annual reporting, complete 
disclosure, and stringent oversight, we will protect our aging 
population. Life settlement deal-makers, including solicitors 
and promoters, must be licensed and subject to examination, 
penalties and revocation.
    Our economic crisis has been attributed to the failure of 
institutions and Federal regulators to understand assets and 
liabilities on which enormous institutional bets were placed. 
As this crisis proves, regulation must enhance transparency of 
otherwise mysterious financial products.
    As legislators and regulators, on behalf of our parents, 
our aging neighbors, friends, and constituents, we need 
unmitigated transparency in the business of life settlements. 
For these reasons, while actively engaged on a State level, Mr. 
Chairman, we pledge to support this special committee, and 
offer our support for your continued efforts.
    Thank you for your attention. I look forward to your 
questions.
    [The prepared statement of Mr. McRaith follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    The Chairman. Thank you, Mr. McRaith.
    Mr. Joseph.

STATEMENT OF FRED JOSEPH, COMMISSIONER, DIVISION OF SECURITIES, 
COLORADO DEPARTMENT OF REGULATORY AGENCIES, ON BEHALF OF NORTH 
   AMERICAN SECURITIES ADMINISTRATORS ASSOCIATION, DENVER, CO

    Mr. Joseph. Thank you, Chairman Kohl, Ranking Member 
Martinez, and committee staff. I'm honored to be here today to 
discuss the impact life settlements have on our citizens, and 
the need for strong regulation of these financial products by 
the appropriate regulatory authorities.
    Over the years, the North American Securities Administrator 
Association, or NASAA, and its members have been extremely 
active in dealing with the problems associated with viatical 
and life settlement investments, terms that have become 
interchangeable.
    At the outset of my testimony, I'd like to offer 3 general 
principles that I believe should guide legislators and 
regulators as they address the continuing challenges arising 
from these products.
    First, life settlements are complex financial arrangements 
involving both securities and insurance transactions. 
Consequently, regulating them effectively requires a joint 
effort by securities and insurance regulators, each applying 
their laws and expertise to different aspects of the product.
    Second, although life settlements may serve a useful 
purpose by enhancing the value and liquidity of life insurance 
policies, they also pose significant risk to policy holders and 
investors. For example, thousands of investors--many of them 
senior citizens--have been victimized through fraud and abuse 
in the sale of viatical and life settlements. Notwithstanding 
substantial successes by State securities regulators with their 
enforcement actions, and higher standards among industry 
participants; abuses continue. Diligent oversight of these 
products remains necessary.
    Finally, life settlements are constantly evolving in terms 
of product design, the policy holders involved, and the types 
of investors to whom they are marketed. Accordingly, lawmakers 
and regulators must carefully monitor these developments and 
respond to new challenges by creatively applying their existing 
laws and, where necessary, adopting new laws and regulations. 
This is one reason why I applaud the committee for convening 
this hearing today, and focusing attention on this important 
issue.
    Traditionally, viatical settlements have involved two 
distinct transactions. In one, the viatical settlement provider 
pays the insured some portion of his or her death benefit, in 
exchange for an assignment of the sale of the insurance policy 
to the provider. This is an insurance transaction, properly 
regulated under State insurance law.
    In the other, the provider arranges for interest in the 
settled policies to be sold to investors, with the promise of 
returns to be paid upon the death of the insured. This is a 
securities transaction, properly regulated by our State and 
Federal securities laws. The offer and sale of investments in 
viatical settlements has been marked by a wide range of 
fraudulent practices, and these abuses have been documented in 
scores of enforcement actions by securities regulators over the 
years, as well as scholarly articles profiling the industry.
    In addition, in classic Ponzi schemes, promoters have used 
fraudulent life expectancy evaluations that are prepared by 
captive physicians, inadequate premium reserves, and false 
promises of large profits with minimal risk.
    In short, while viatical transactions have helped some 
people obtain funds needed for medical expenses and other 
things, those benefits have come at a high price for investors, 
many of them senior citizens. To address these problems, State 
regulators and the SEC have fought strenuously to regulate 
viatical settlements under securities laws. Those laws require 
sales agents to be screened, licensed, and tested. Promoters 
must register their offerings with securities regulators, and 
make detailed disclosures to investors. The securities law 
impose strong financial anti-fraud standards, and they provide 
remedies to deter violations.
    Using these laws, securities regulators have significantly 
reduced the incidence of fraud in the securities market. But 
our members continue to see evidence of bad actors that once 
characterized the entire industry.
    For example, in May 2007, my office in Colorado filed an 
enforcement action against a company called Life Partners, and 
its affiliates and agents. We alleged that for 3 years, the 
defendants sold unregistered viatical settlement investments to 
over 100 Colorado investors, netting over $11 million. We also 
alleged that Life Partners' sales agents were unlicensed, they 
marketed the investments using fraudulent misrepresentations.
    In December of last year, the District Court held that the 
offerings were unregistered securities, marketed through 
unlicensed agents. Life Partners subsequently stipulated to a 
permanent injunction, and agreed to make rescission offers to 
all Colorado investors.
    The viatical settlement industry has changed significantly 
since its early days, and it continues to evolve in terms of 
viators, investors and industry participants. For example, the 
role of institutional investors have become increasingly 
prominent in the life settlement market. Along with this 
development is a desire among some life settlement companies to 
raise standards of conduct, promote sound regulation, and 
establish a legitimate industry sector, untainted by past 
abuses.
    In conclusion, lawmakers and regulators must follow all of 
these trends and must be prepared to acknowledge improvements 
in the industry, but also to address any new threats to viators 
and investors that may arise.
    I look forward to the findings of the committee in this 
important area of financial services regulation, and I thank 
you, again, for the opportunity to share my views.
    [The prepared statement of Mr. Joseph follows:]

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    The Chairman. Thank you, Mr. Joseph.
    I believe that each of you, in your own good way, has 
demonstrated and testified today that the life settlement 
industry is a legitimate industry, albeit a new one. That it 
has a real place in the market under certain circumstances, but 
that because it is new, and growing as quickly as it is, it is 
not sufficiently regulated in order to see to it that we 
protect consumers to the extent that they fully deserve. Thats, 
what we need to do is take a careful look at this industry, and 
provide the kind of oversight and regulations that will ensure 
that those people who participate in life settlement situations 
are fully protected. Is that a fair statement?
    [Panelists nod in agreement.]
    The Chairman. Anybody disagree with that in any way?
    Mr. Joseph. Senator.
    The Chairman. Mr. Joseph.
    Mr. Joseph. There have been problems in the past, from the 
securities side of the transaction. At least from the outset 
there were companies involved some are no longer with us, 
obviously, that conducted their business in a fraudulent 
manner; the policies didn't exist, or the returns that they 
touted were outlandish, and that sort of thing, from the 
securities side of the transaction. So, I will say that from 
the outset.
    The Chairman. There's room for outright fraud and 
dishonesty?
    Mr. Joseph. Absolutely. Absolutely. In some cases, prison 
sentences were imposed on the perpetrators.
    The Chairman. Senator Martinez.
    Senator Martinez. Well, thank you, Mr. Chairman, and I want 
to thank all of the witnesses for very thoughtful statements 
and very enlightening information that you've shared with us.
    Let me see if I may have a couple of questions for Mr. 
Leimberg. I wanted to ask, where do you believe is the greatest 
opportunity for consumers to be harmed in these kinds of 
settlement transactions?
    Mr. Leimberg. I think the single-biggest harm is the taking 
away of a life insurance policy that is really needed. If there 
is no holdfold analysis, if there is no analysis of ``what do 
you need?'' before you take it away, if you merely give them a 
set of cookbook statements of, ``Here are the possible things 
that can go wrong,'' and fold up your tent--if there is no 
analysis, people will lose life insurance they really need to 
keep.
    Senator Martinez. How would you propose that that hold or 
fold analysis take place? Would Ms. Senkewicz, in your office, 
would they--would you do that kind of an analysis? Or would 
there have to be a certification that that has been explained 
to the customer, and that you've got like a form that you've 
filled out, with certain questions asked and answered?
    Mr. Leimberg. A needs analysis is the first thing a good 
life insurance agent will do.
    Senator Martinez. Yeah, but how can you impose that on the 
industry, is what I'm saying. I mean, is there a set of 
regulations you propose, or--?
    Mr. Leimberg. Well, certainly you can demand that--
    Senator Martinez. I mean, that could be a good business 
practice--
    Mr. Leimberg [continuing]. State law could require that 
practice be done, and that they--the documents be kept in the 
hands of the client, and perhaps in the hands of the broker, as 
well, and perhaps even the settlement company itself might 
demand a copy, just to satisfy itself that a needs analysis has 
been done.
    Senator Martinez. Ms. Senkewicz, any comment on that issue?
    Ms. Senkewicz. Thank you, Senator.
    Yes, it would have to be spelled out in Florida statute, 
because this industry has made it abundantly clear to our 
office that unless it is spelled out specifically in statute, 
we enforce the statutes of the State of Florida, we don't make 
them--it would have to be spelled out, because it's abundantly 
clear that if we tried to do it without it being spelled out in 
statute, they'd haul us right into court.
    Senator Martinez. Do you believe that there is enough--
obviously, the State of Florida has some laws in place, I heard 
from Mr. Leimberg that there--42 percent of these transactions 
take place in States with no regulation, whatsoever. We do, in 
Florida, have a set of statutes that regulate the industry, 
correct?
    Ms. Senkewicz. We do have a set of statutes.
    Senator Martinez. I'd like to ask all of the panel members, 
though, do you believe that there is a need for a set of 
minimal guidelines, regulations, that come at the Federal 
level, for the industry? I realize that longstanding tradition 
of insurance being a State issue, and how jealously Insurance 
Commissioner's Offices guard that, and so forth, but is there--
in this instance--some sort of a minimal Federal requirement? 
I'd like to get an answer from each of you on that.
    Mr. Joseph, you go ahead and start--we'll take it from the 
right to the left.
    Mr. Joseph. Senator Martinez, thanks.
    With regard to the securities side of the transaction, 
obviously the SEC has a great interest in this area. I believe 
the Chairman of the SEC responded to Senator Kohl in a letter. 
Traditionally, we've approached these things using investment 
contract law to define a viatical investment as a security. 
However, four years ago, in Colorado, our law--our definition 
of security actually was amended to include the term ``viatical 
settlement investments.''
    I believe, if you really want to help the securities side 
of it, at the Federal level, the law should be amended in the 
Securities Act of 1933, amend the definition to specifically 
state that a viatical settlement investment is a security, 
period. That way, it doesn't have to be argued under investment 
contract law, and the vagueness therein.
    Senator Martinez. Mr. McRaith.
    Mr. McRaith. Sir, Senator, if I could go back to your 
initial question very briefly--
    Senator Martinez. Sure.
    Mr. McRaith. I think the biggest potential harm is when a 
policy is sold or disposed at lower value than what it should 
be. Because all of those lawful life settlements that might 
have legitimate benefits for our aging population, there is no 
guarantee right now that that senior or that individual policy 
holder is being compensated for that policy at a fair market 
value.
    That's where I think the largest harm is at that point, and 
I'm not going to quibble with Mr. Leimberg, he's clearly an 
expert, who I have great respect for.
    In terms of whether there should be a--
    Senator Martinez. Well, let me go back on that. When you 
talk about that issue, how does one--in other words, there--
I've been told, I understand that typically these settlements 
would be for a larger amount than what the person could turn 
the policy back into the company for.
    Mr. McRaith. That's right. The problem is, we don't know 
the food chain, so to speak. We don't know who's being 
compensated, and at what rate, in the evolution of that from 
the gentleman who lives on Maple Street in Tallahassee, FL, as 
that policy works its way into a bundle of policies that's 
being disposed of Wall Street.
    We don't know--there's something in it for everybody along 
that food chain, so to speak, Senator, and what we don't know 
is whether Mr. Jones on Maple Street is getting the best return 
on that policy that he should, or is the compensation to him 
being reduced up front, so that the returns to the people--the 
other participants in that deal--receive enhanced compensation.
    There's absolutely no clarity of that--on these 
transactions--there's no transparency about how these 
transactions actually work, mechanically, and who's getting 
paid what. There's no assurance that Mr. Jones on Maple Street 
is getting the best deal he should--maybe for a policy he's 
paid for, through premiums, for decades, in some cases.
    So, to address your second question about whether there 
should be a Federal minimum standard, I think the first 
challenge as both of you well know, is helping people 
understand what we're talking about. I've worked with our 
legislature in Springfield, as I alluded to, for 17 months--
these are complicated transactions. Insurance, generally 
speaking, is not something people talk about at cocktail 
parties.
    But then, when we start talking about life settlements, and 
what that means, eyes will frequently glaze over, and people 
have, generally, trouble understanding. So, the work of this 
committee, in raising attention, raising the profile of the 
importance of this topic, is something that I think is a real 
important national Federal first step to deal with these issues 
at a State level.
    Senator Martinez. I'll go back to you, Mr. Chair.
    The Chairman. I think so, and that's precisely why, as 
you're suggesting, that we have this hearing today, and we 
begin to highlight the industry and the potential pitfalls.
    But I think we're all agreeing that it's one thing to 
highlight the industry, and the kinds of things that can happen 
to adversely affect people which, while absolutely necessary. 
From there, to go to proper regulation, is a whole other step, 
which has to be taken.
    Isn't that right, Mr. McRaith?
    Mr. McRaith. I would agree with that, yes. Absolutely, Mr. 
Chairman.
    The Chairman. Do all of you feel that we're a long way from 
there? A long, long way?
    Mr. Leimberg. Absolutely. Absolutely. I think that bad 
actors will find cracks in State laws, and they will exploit 
them to their fullest extent.
    What we've got right now is a patchwork of State laws, and 
I don't see anything but a patchwork of State laws. So, without 
some kind of Federal oversight, we're going to continue that 
patchwork, and the bad actors will drive a truck right through 
it.
    The Chairman. Well, let's ask the other panelists about 
that. You're suggesting that the State laws we have, the 
patchwork of State laws we've had are not adequate, that we 
need Federal regulation to begin with, to be followed by 
adequate State regulation. Is that right?
    Ms. Senkewicz. Mr. Chairman, if I might address that 
question. I believe the Senator's question may have also been 
instigated by something in my testimony where it did--at least 
on the STOLI level--allude to, perhaps, banning it at the 
Federal level.
    But, I must admit, that statement is borne somewhat of 
frustration in the difficulty we've had in Florida in passing 
what we consider, at the Office of Insurance Regulation, 
inadequate viatical, or life settlement law. The fact is, as I 
stated in my written testimony, the office introduced a bill to 
enhance both the reporting, the disclosures, strictly on the 
viatical, or life settlement side, plus the measures to address 
STOLI, and the industry came back with, did not support us in 
that effort, hired lobbyists, and came back, in fact, with an 
alternative draft that was put forth as being an adequate STOLI 
bill, but in fact, if you read it very carefully, gutted what 
we were even doing--that little that we were able to do.
    So I would suggest that there has been some difficulty at 
the State level. So, if the States were aware, and industry 
aware that Congress--yes, you really are interested in this, 
and that perhaps a few years down the road, if the States have 
not been able to adopt the NAIC model, for example, across the 
board, to adequately protect consumers from some of these 
issues, then I think that that would be fair warning.
    The Chairman. Mr. McRaith.
    Mr. McRaith. Yes, Mr. Chairman.
    Just to follow up--there will always be bad actors who will 
always evade any regulation that's in place--we know that. I 
think the first key to any successful regulation is reporting 
and accountability so we can track how the industry evolves.
    As you well know, this industry has evolved from a $2 
billion industry at the beginning of this decade to over--some 
estimates are over $30 billion right now--it's evolving, 
quickly. The important thing is, do we have the information so 
we can make informed public policy decisions, going forward.
    The Chairman. Yes, Mr. Joseph?
    Mr. Joseph. Senator Kohl, if I could just speak briefly, in 
Colorado--just in Colorado only, when we passed our law, four 
years ago, it was a dual act, it addressed insurance, 
primarily, and then at the very end it spoke to the securities 
part, where it changed the definition of security in our law.
    Actually, I believe--and I'd like to offer this to your 
committee staff to look at it--I believe it's a good roadmap as 
to, perhaps, what approach should be taken. I'm not willing to, 
totally say that, at the State level, that we can't handle it, 
because I believe--at least in our State--we're dealing with it 
based on the law that we have in place. So, I'm pleased with 
the way it works.
    The Chairman. Any other comments from the first panel? 
Questions?
    Senator Martinez. None from me, sir, but I want to thank 
the panel for insightful information.
    Mr. McRaith. Thank you.
    The Chairman. You've provided some really important 
information to us today, and enlightenment, and so we thank you 
for being here.
    Mr. McRaith. Thank you very much.
    The Chairman. Thank you so much.
    The first witness on this second panel will be James Avery. 
Mr. Avery is President of Individual Life Insurance at 
Prudential. In 2007, Mr. Avery became chairman of the Life 
Insurance Committee of the American Council of Life Insurance, 
known as ACLI.
    He's also a member of the ACLI CEO Taskforce on Secondary 
Markets. Mr. Avery is a Fellow of the Society of Actuaries, and 
a member of the American Academy of Actuaries.
    Our next witness will be Scott Peden, General Counsel and 
Secretary of Life Partners Holdings and the President and Chief 
Operating Officer of its primary operating subsidiary, Life 
Partners, Inc.
    Mr. Peden has worked on legislation and regulation for the 
protection of all parties in the transaction of life 
settlements, and he's testified before the National Council of 
Insurance Legislators, and State insurance committees and 
regulators.
    Finally, we'll be hearing from Michael Freedman, Senior 
Vice President of Government Affairs for Coventry First, the 
country's leading purchaser of life settlements.
    Prior to joining Coventry, Mr. Freedman served as Vice 
President of Public Affairs and Public Policy for Global 
Crossing, Limited. He also previously served as Associate 
Attorney in New York and received his law degree from the 
University of Buffalo.
    We thank you all for being here. Mr. Avery, we'll take your 
testimony.

 STATEMENT OF JAMES AVERY, JR., PRESIDENT, INDIVIDUAL LIFE FOR 
  PRUDENTIAL FINANCIAL, ON BEHALF OF AMERICAN COUNCIL OF LIFE 
                      INSURERS, NEWARK, NJ

    Mr. Avery. Good afternoon, Chairman Kohl, and Ranking 
Member Martinez and committee staff. I thank you for inviting 
me here to discuss the exposure of senior citizens to abusive 
life settlement practices.
    As you know, for centuries, life insurance has served as a 
valuable economic instrument, protecting families and 
businesses from the potentially devastating financial impact of 
an untimely death.
    Now, my comments here today are going to be limited to just 
a sub-set of life settlements which are really predatory 
schemes designed--in our opinion--to subvert the true purpose 
of life insurance. The schemes are intended solely to enrich 
both the intermediaries who initiate them, and investors, who 
are looking for above-market returns.
    Called stranger-owned life insurance--as already 
referenced, or known as, STOLI--they are fraudulent and they 
are contrary to both public policy and State law, which require 
life insurance policy owners--or beneficiaries, for that 
matter--to have an initial insurable interest in the continued 
life of the insured.
    Quite to the contrary, STOLI policy owners and 
beneficiaries have an interest only in the death of the 
insured. Quite frankly, the sooner the better.
    Vulnerable seniors are lured into these schemes with offers 
of free insurance for a couple of years, along with promises of 
cash incentives, free meals, and even vacations. They may be 
asked to sign applications that grossly misrepresent the 
current condition of their health, or their income, and even 
their net worth. The senior may also wind up signing documents, 
which unknowingly make them responsible for extremely large 
loans, with high interest rates, to fund the initial premiums 
on the so-called ``free'' insurance.
    The stranger, or speculator, initiating the transaction is 
actually attempting to cherry-pick the individuals with the 
shortest life expectancy, and thereby arbitrage the pricing 
assumptions that the insurance providers is using.
    Now, after a two-year contestability period, when the 
insurer can no longer rescind the coverage due to fraud or 
misrepresentation, the senior is usually faced with two 
options. They can either repay the loan that was used to fund 
the initial premiums--at a significant cost, usually hundreds 
of thousands of dollars--or they can sign over the life 
insurance policy as to the speculator, in full satisfaction of 
the loan. As you might imagine, the senior really generally 
only has the latter as their choice.
    The policy is then packaged into a death bond and sold to 
investors. As part of the scheme, the senior must agree to 
periodic phone calls or visits, to monitor his or her own 
continued existence. Sadly enough, if life expectancy is less 
than a year, these grim reaper calls can occur as frequently as 
monthly.
    Now, many of your constituents, in society overall, are in 
fact harmed by STOLI schemes. First, the victimized senior is 
usually unintentionally participating in what is a fraud. The 
senior may be responsible for undisclosed taxes, as was 
mentioned, on the economic value of the free coverage, the 
forgiveness of the loan, as well as any other incentives that 
they've accepted as part of the arrangement.
    There's actually no guarantee, in fact, that the speculator 
will acquire the policy after two years. They can change their 
mind. It may be that the senior's health has improved, or that 
the speculator no longer has the funds to pay the future 
premiums that will be required. They can walk away, and in some 
cases, the senior may be responsible for the outstanding loan.
    The senior may be ineligible for additional life insurance 
coverage that they need for their own benefit--either for their 
beneficiaries, or for their estate planning, or to support 
other beneficiaries, because the investor is now holding all of 
the coverage that they may be entitled to buy from the 
insurance industry.
    Yet, the financial markets are maybe once again exposed to 
another sub-prime-like securitization scheme, which really only 
benefits the intermediaries, as we've learned.
    The life insurance industry strongly supports legislation 
to stop STOLI, but it has faced stiff opposition, as you've 
heard earlier, from settlement providers, premium finance 
companies, and the investors.
    The State legislators are continually told that life 
insurance is not being sold for investors. However, I will tell 
you--many investigations and court cases have provided evidence 
to the contrary. In fact, I will share with you one of many 
examples.
    At my own company, Prudential, we uncovered a case last 
August, after Ohio had passed a very effective law prohibiting 
all STOLI. It involved a 74-year-old woman who was driven from 
her home in Cleveland, OH, to Pittsburgh, PA, which has no such 
law, for a medical exam, and to sign an insurance application.
    When she was interviewed by our investigator, she was 
shocked to learn that the death benefit on the policy that she 
applied for was $9 million. She was shocked, because her and 
her husband's monthly income was $950 from Social Security and 
they had a total net worth of $2,000. Needless to say, once she 
learned what had been undertaken, she was very concerned for 
her own personal safety. This is one of many such examples.
    Now, as you probably know, insurers design, and they price 
their policies, using averages to assess the probability of 
death, surrender, and lapsation of coverage, over the life of a 
large book of business. While those who are fortunate enough to 
live long lives may enjoy the peace of mind of knowing that 
their family or business had been protected financially, they 
are also the ones that fund the early death benefits to the 
unfortunate ones who die an early death, that suffer an early 
death. That's how all insurance works.
    This is not the case with STOLI. The investors hope to 
realize an above-average return by buying policies only on the 
lives of those selected individuals who they expect--and hope--
will die early. History suggests that if they are successful at 
these transactions, they will be undermining the ability of the 
life insurance providers to offer legitimate and needed 
coverage to responsible citizens.
    In conclusion, the life insurance industry is working hard 
to get legislation passed in each and every State, to prohibit 
all forms of STOLI, and to ensure that life insurance continues 
to be readily available, on an appropriate, and an affordable 
basis.
    I, again, thank the committee for this opportunity to 
testify on behalf of the insurance industry, and we are hopeful 
that this hearing, and the findings that you bring forth, will 
encourage all State legislators to continue efforts to curb 
this abusive practice, which is a threat to all of your 
constituents, and especially the senior citizens.
    Thank you.
    [The prepared statement of Mr. Avery, Jr. follows:]

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    The Chairman. Thank you, Mr. Avery.
    Mr. Peden.

      STATEMENT OF SCOTT PEDEN, PRESIDENT, LIFE PARTNERS, 
                     INCORPORATED, WACO, TX

    Mr. Peden. Mr. Chairman, Senator Martinez and members of 
the committee, I'm honored to testify in front of you today as 
an industry representative, on behalf of Life Partners, Inc., 
as this panel examines the life settlement industry. I 
appreciate the work of this committee in protecting the 
interests of our parents and our grandparents.
    Life Partners is the oldest, and the only publicly traded 
provider in the life settlement industry. The typical policy 
that is presented to Life Partners is $1 million to $10 million 
in face, and is owned either by a legal entity--such as an 
insurance trust--or by financially sophisticated individual.
    As is apparent, most senior Americans do not own the type 
of large-face policies that I'm referring to. The policy owners 
that Life Partners deals with are financially sophisticated 
seniors.
    The life settlement industry provides a private sector 
solution to a public sector problem--that is, illiquidity among 
senior Americans. Prior to the establishment of our industry, 
policies which are now sold would simply have been abandoned, 
and the inherent value in those policies given up as windfall 
profits to life insurance companies.
    Now, the liquidity needs of these seniors are being met, 
privately, discretely, and in a manner that is beneficial to 
both the purchaser and the seller. We ask nothing more than for 
insurance companies to fulfill these contracts into which they 
freely entered.
    Unfortunately, the life insurance lobby has promoted State 
legislation to deter these life settlements, and help them 
retain their windfall profits. The insurance lobby is extremely 
well-financed and influential, but it is not looking out for 
the best interests of American seniors. That is unfair, and 
extremely detrimental to policy owners.
    Now, let me address some of the issues that the committee 
is specifically investigating. No. 1, the issue of soliciting 
seniors to purchase policies for a later sale.
    We know that there is a concern for senior citizens who 
might fall victim to arrangements in which they are paid to 
purchase a policy with a contemporaneous arrangement to sell 
it, at a future date. This, so called, investor-initiated life 
insurance, or stranger-initiated life insurance, is a practice 
which Life Partners has never engaged in. But it is important 
to note that this is an agent supervision issue--not a live 
settlement issue.
    Insurance agents should assess the true needs of consumers, 
and should answer all application questions truthfully. But, it 
is up to the insurance companies to make sure that their agents 
follows these rules. Then, if the insurance company chooses to 
issue a policy, they do so with the full knowledge that the 
United States constitution permits that policy owner to sell 
the policy at some point in the future.
    No. 2, the regulation of live settlement brokers, and their 
commissions. A live settlement broker offers valuable advice 
and services to their clients, and they deserve to be 
compensated for it. However, unlike our company, they represent 
the policy owner. Uniform, Federal regulation may be 
appropriate in order to protect those who are financially 
unsophisticated.
    No. 3, State versus Federal laws a regulations. Article I, 
section 8 of the United States Constitution authorizes Congress 
to regulate commerce among the several State. Most life 
settlement transactions are interstate in character, sometimes 
involving a number of different States. The burden of complying 
with a patchwork of conflicting State laws only raises costs, 
and lowers the ultimate value paid to policy owners.
    Of course, State legislators can certainly regulate 
intrastate transactions, but the jurisdiction of State 
legislatures must end at their borders, and States' efforts to 
extend their jurisdiction beyond their borders, and venture 
into congressional jurisdiction, must be clearly and completely 
preempted.
    No. 4, clarifying the tax liabilities arising out of a life 
settlement transaction. We would urge the committee to consider 
legislation which clearly defines any tax liability for policy 
owners. We believe that the proceeds from a life settlement 
should be treated as a capital gain or loss, based on the 
difference between the total amount of premiums paid for the 
policy and the amount of proceeds from the sale.
    Our overall recommendations to Congress for dealing with 
the life settlement industry are as follows: First of all, 
recognize that the secondary market for life insurance is not 
the business of insurance, and should be regulated differently 
than our insurance companies.
    No. 2, passing legislation which expressly federally 
preempts the entire field, establishing a uniform set of life 
settlement regulations at the Federal level, at least for 
interstate transactions. This will promote interstate commerce, 
reduce uncertainty, and provide value to seniors who want to 
sell their policies.
    Also, it should recognize that many of the reported abuses 
or problems with the issuance of policies to unqualified 
insureds, rests with practices of insurance agents, and 
insurance companies--not with life settlement companies.
    Recognizing that strict regulation may not be appropriate 
or necessary for accredited or sophisticated insurance 
consumers, and establishing an appropriate regulatory construct 
that recognizes a distinction between ordinary insurance 
consumers, and those who are financially sophisticated.
    Mr. Chairman, Senator Martinez, it has been a privilege to 
offer our company's perspective on the life settlement 
industry. Life Partners has a firm commitment to protecting 
unsophisticated policy owners, and preserving the property 
rights of all senior Americans. We appreciate your 
consideration, and look forward to your questions.
    [The prepared statement of Mr. Peden follows:]

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    The Chairman. Thank you, Mr. Peden.
    Mr. Freedman.

     STATEMENT OF MICHAEL FREEDMAN, SENIOR VICE PRESIDENT, 
       GOVERNMENT AFFAIRS, COVENTRY, FORT WASHINGTON, PA

    Mr. Freedman. Chairman Kohl, Senator Martinez, my name is 
Michael Freedman, I am the Senior Vice President of Government 
Affairs for Coventry First. I appreciate the opportunity to 
testify before the committee, and especially appreciate the 
committee's interest in the secondary market for life 
insurance, and life settlements, specifically, and the 
question, what's at stake for seniors? I'm pleased to share my 
views on that subject today.
    As the market for life settlement develops, a lot is at 
stake for consumers. One of the most significant of these 
issues is whether consumers will be able to realize the fair 
market value for their policies.
    Until recently, policy owners had two options for divesting 
unneeded, underperforming, or unaffordable policies. Stop 
paying premiums and allow the policy to lapse, or surrender the 
policy.
    According to a leading international actuarial firm, 
approximately 88 percent of life insurance policies are 
surrendered or lapse without paying a death benefit.
    A policy surrender value is typically a small fraction of 
its market value, and the value paid by an insurer for a lapsed 
term policy is zero.
    Life settlements provide a valuable alternative to the 
lapse or surrender of a policy. They pay policy owners fair 
market value for their policies. These payments typically 
exceed the surrender value by many multiples. Coventry is a 
leading participant in that market, and we have paid policy 
owners approximately $2 billion in excess of surrender value of 
their policies.
    Coventry purchases policies mostly from sophisticated 
trusts, corporate entities, and high net-worth individuals who 
are represented by counsel and financial advisors. We believe 
that these policy owners' decision to sell a policy should be 
properly performed.
    Coventry requires sellers to establish that they are 
sophisticated. We disclose to consumers alternatives to life 
settlements, including borrowing against their policies, cash 
value, and accelerated death benefits available under the 
policy.
    In addition, we inform prospective sellers that life 
settlements may have tax consequences, and advise them to seek 
professional advice before selling their policies.
    Of equal importance, Coventry strongly believes that 
consumers' privacy must be protected. To that end, we had 
implemented extensive procedural safeguards that protect 
confidential financial and medical information of policy 
owners, and insureds.
    How do we protect what's at stake for consumers? Coventry 
believes in a properly regulated life settlement market, with 
regulations that provide clarity, consistency, transparency, 
and a level playing field. We proactively support life 
settlement regulation across the United States.
    The American Council of life Insurer's has referred to 
Coventry as the ``principal initiator of life settlement 
legislation in the States.'' Today, 31 States regulate life 
settlements, and States such as California, New York and 
Illinois are in the process of enacting such laws this year. By 
the end of 2009, State law regulating life settlements are 
expected to cover nearly 90 percent of Americans.
    Coventry supports measures that prohibit stranger-
originated life insurance. We do not condone STOLI 
transactions, and we have supported the legislation adopted in 
numerous States since the start of 2008, addressing STOLI.
    As we come together today to consider what's at stake for 
consumers, I feel compelled to report that many insurance 
companies aggressively take steps to deprive consumers of 
access to this important market. It has been a common practice 
for insurers to prohibit their agents from informing policy 
holders about the option of a life settlement. Insurance 
companies have terminated agents for helping their customers 
sell their policies, leaving these consumers with few, if any, 
option beyond the lapse or surrender or those policies.
    Insurers have sought to rescind policies sold in the 
secondary market, and have imposed contractual restrictions on 
policy sales. Some have even refused to issue policies when a 
prospective policy owner indicates an awareness of the policy's 
market value. Worse still, insurance companies have promoted 
legislation that has been criticized as anti-consumer and 
protectionist by State legislators and by consumer advocates. 
All of these efforts are calculated to protect corporate 
profits at the expense of consumers.
    Coventry supports fair competition in a market regulated to 
provide transparency for consumers and a fair playing field for 
business. Such a market is the best way to protect and provide 
the most value for consumers.
    I appreciate the opportunity to appear here today, and I'm 
available to answer any questions, Chairman Kohl.
    [The prepared statement of Mr. Freedman follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    The Chairman. Mr. Freedman, what actions has your firm 
taken to ensure that your brokers are not engaged in stranger-
originated life insurance, known as STOLI?
    Mr. Freedman. Mr. Chairman--
    The Chairman. Mr. Freedman, then we'll hear from you, Mr. 
Avery.
    Mr. Avery. Thank you, thank you.
    Mr. Freedman. Mr. Chairman, as I indicated in my testimony, 
we do not condone STOLI. STOLI is a practice that hurts 
consumers, it hurts insurance companies, and it hurts the life 
settlement market.
    But, as Mr. Avery characterized it as a sub-set of life 
settlements, it's not. It's a sub-set of the sale of life 
insurance. Our companies don't have the authority to write life 
insurance, but it's the agents of the carriers that do. It is a 
problem at the inception of a policy, and not the assignment.
    As I've indicated, we have supported legislation primarily 
based on the National Conference of Insurance Legislators that 
provides targeted measures to attack STOLI where it occurs--at 
the inception of a policy. Measures to identify the schemes 
that are being used in premium finance transactions, 
transactions that are used to hide it in trust arrangements, to 
attack where it occurs, in the sale of life insurance.
    The Chairman. Mr. Avery, would you like to comment?
    Mr. Avery. I would comment on a few points, here, if I may.
    First, at Prudential, which I will comment on, we attempt 
to understand the need for the insurance and the funding of 
insurance, and that we really are protecting someone who has an 
insurance need. If so, regardless of the funding, we will offer 
that insurance. If we think it is STOLI, we will not.
    In regards to one of the comments that I think both of the 
gentlemen made about windfall profits, and insurance companies 
trying to hold onto those, I think we all would agree--and I 
think the gentlemen here are equally smart to understand--is 
under a fire insurance policy, it is priced to pay claims on 
only those policies that result in a devastation of the home.
    Similar in life insurance--these are not windfall profits. 
Insurance companies price their policies to take into account 
hose policies that are expected to surrender and those, as they 
point out, that are expected to lapse. So, there really is no 
windfall profit issue, here, this is a function of what is 
taken into account in the pricing of the policy.
    The Chairman. Mr. Peden, you would like to see the 
patchwork of State regulations replaced by a Federal uniform 
law. What would such legislation include? Are there any State 
statutes that we might consider, at the Federal level?
    Mr. Peden. Well, at the risk of looking chauvinistic, 
Texas, I think, has a very good law, and certainly would serve 
as a fine model. I think the important thing is, if it is done 
on a uniform level--and that's where we have the problem right 
now--it is patchwork because many of the States' laws are 
conflicting. What we need is one set of rules that applies to 
interstate commerce. That is why I've promoted the Federal 
legislation which would then preempt the States from going off 
and doing their own things.
    What I think is necessary is the recognition that the 
secondary market for life insurance is regulated in a different 
way than life insurance is done, and so it doesn't necessarily 
take away from those States who want to regulate and have 
traditionally regulated life insurance companies. We're not 
trying to do that.
    But we are trying to do is demystify and uncomplicate 
transactions, which have become unnecessarily complex because 
of this patchwork. If we have one set of rules, especially with 
regard to disclosures, with regard to what must be done, 
everybody knows the rules, and so we're all singing off the 
same page. If you're not, that leads to uncertainty, risk 
evaluation, which we have to price in, and the fact that you 
may not be able to sell your policy, at all.
    If you're in a State which has onerous regulation and not 
very much business, you won't be licensed in that State. So 
that deprives individual seniors who are there, who want to 
sell their policy, of the ability to access a market.
    Federal regulation, it seems to me, is the most effective 
and efficient way of being able to level the playing field, and 
make sure everybody knows what the rules are.
    The Chairman. Mr. Avery, Mr. Freedman, do you agree with 
what Mr. Peden--Mr. Freedman?
    Mr. Freedman. Mr. Chairman, Senator Martinez, I believe 
that the story of regulating of life settlements has been a 
good story, simply because 6 years ago, 10 States had 
regulation. As we sit here today, 55 percent of Americans are 
covered by State regulation governing life settlement 
transactions. As I indicated in my testimony, with the passage, 
hopefully, of laws expected in California, New York, Illinois 
and other States, the number of--the percentage of Americans 
that will be covered by State regulation of life settlements 
would be close to 90 percent. That's a good story.
    I think beyond that is that--the fact that consumers are 
well-protected in the transaction, from the moment they say, 
``I think I want to sell my policy,'' the law requires they 
deal with a licensed person, that companies like ours be 
licensed, that the transaction have lots and lots of 
transparency in that transaction.
    It's important, too, that we have been able to reach the 
kind of consensus on legislation, around this country. Just in 
the last year and a half the life settlement industry, our 
company, and the life insurance industry have equally supported 
legislation in 14 different States.
    The most recent State that signed into law was Washington 
State. Unanimous support for that by all parties, it includes 
all the kinds of consumer protections I'm talking about, but 
importantly included also a protection to make sure consumers 
knew about their option to sell their policy, so that they 
weren't left in the dark, so they weren't being prevented from 
hearing about it, that's the kind of legislation that we would 
support. The ACLI supported it, we supported it, and we think 
that's a good model for the rest of the nation.
    The Chairman. Yes.
    Mr. Avery, would you comment?
    Mr. Avery. Yes, we agree with Mr. Peden that different 
patchwork legislation is problematic, however we will state 
that both the NAIC Model Bill, which was then followed by the 
National Conference of Insurance Legislators Model Bill, are 
very good bills, and in fact together, we think they solve the 
issues that we're discussing today.
    However, when we go State by State, we do find the 
settlement industry and the premium finance industry lobbying 
very hard for changes to those law or model acts that we think 
really water them down or create loopholes. That is what's 
creating the patchwork. We do have model laws, that if adopted 
as designed either by the NAIC or NCOIL, or some combination 
thereof, we think effectively address the most egregious issues 
here.
    I will state that one of the things, that I think you 
highlighted in your opening comments, is the need for 
transparency, which I think all panel members agree. We need 
not just transparency at the individual transaction level, but 
we've heard issues earlier today about some of the industry 
fighting the ability to collect data on transactions 
undertaken.
    The latest transaction data that we've seen, and it's from 
the settlement industry and it's not total, it's about one-
sixth of the transactions, indicate to us, from their own data, 
that 50 percent or more of the policies that settled in 2008 
were only in force between two and four years--or, I'm sorry--
in force less than four years. Yet, when we talk about 
settlements, we think of people owning policies a long time and 
then not needing them. When you combine that with the comment 
that these tend to be large policies held by a trust the actual 
data, if we had it, would tell us, what's the real essence of 
the transactions going on and are we dealing with people who 
have held insurance and no longer need it, and therefore have a 
commercial right to sell it? Or are we dealing with policies 
that were fabricated for the purpose of stranger-initiated life 
insurance? That would be very helpful.
    The Chairman. Good.
    Mr. Martinez.
    Senator Martinez. Thank you, sir, I appreciate it.
    I would agree with you, Mr. Avery. I think that is a very 
healthy way of looking at it and that's the kind of 
transparency that I think we have been discussing. Because I 
think we unanimously agree that STOLIs are bad, but yet they 
continue to exist and grow in numbers. So, I would ask you, and 
then other panel members, what are we going to do about it? How 
do we get it to stop?
    I think Mr. Freedman makes a good point, they're at the 
tail end of the transactions--I have a lot of questions about 
that end of the transaction--but they don't originate the 
policies in the first place. So, how does it happen? I mean, 
obviously they don't write policies. You do, or your agents do. 
How do we improve that part of the equation?
    Mr. Avery. Well, I'll speak for a minute on behalf of 
Prudential and not the American Council Life Insurers.
    Senator Martinez. But, speak on both.
    Mr. Avery. OK, I--at Prudential we do not allow our agents 
to participate in these transactions and we spend a significant 
amount of money and resources policing this, which is not 
helpful, but we do it because we do believe these transactions 
are bad for the industry and the consumers as a whole, because 
that's what we do.
    I believe at the American Council, I think companies that 
are as concerned as we are on it are attempting to do the same 
thing, but it is patchwork and you do run into the legal side 
of how do you really find fraudulent transactions?
    As you might imagine, finding fraudulent transactions and 
proving them in a timely way is both expensive and is not fail-
proof. So that is one of the reasons why we encourage 
legislation after, say, the NAIC Model Act and NCOIL Model Act, 
which we think would be effective. In the NCOIL Act, it makes 
STOLI a fraudulent act, which then can come with criminal and 
civil penalties, and we think that's appropriate.
    Senator Martinez. Mr. Peden, we know that the sellers of 
these kinds of policies can liable for tax liability, to the 
extent that they have a gain on the investment that they're 
making. Does your firm disclose the potential for tax 
liability?
    Mr. Peden. We do. We make the similar kinds of disclosures, 
which agreements--contracts also do, we just suggest that they 
consult their tax advisor in that regard, because each person's 
tax consequences may be different, depending on the 
circumstances.
    Senator Martinez. Do you issue them a 1099?
    Mr. Peden. We do--the escrow agent that we use does issue 
the 1099 in that regard.
    Senator Martinez. Mr. Freedman, I am obviously concerned, 
as you would imagine, with the issue in Florida. Ms. Senkewicz 
spoke about that, and we discussed it as well. There seems to 
be a settlement that was undertaken as a result a number of 
transactions in the State of Florida.
    There was a resolution to this matter back 2007 and a 
consent order was entered. You agreed to adopt a business 
practice enhancement plan, is my understanding. You also agreed 
to pay $1.5 million in connection with the Office of Insurance 
Commissioners Investigation and Examination, and agreed to 
future examinations.
    Now, Ms. Senkewicz told us here today that there is now 
litigation about whether or not they can look at your books and 
see whether your practices now are more in keeping with good 
business practices, Florida law, et cetera. It would seem to me 
that in good faith, your--your company would welcome this 
oversight. It would be part of what it takes to do business in 
the State of Florida.
    Rather than a motion for preliminary injunction, you should 
say, ``Here are the books, look them over. We want to be in 
compliance with Florida law, we want to have good business 
practices. We know we have a sordid record,'' that you might 
disagree with what occurred, but you did enter into a 
settlement.
    There are questions that I think are very legitimate about 
your practices in New York. So, why wouldn't you want to have 
Florida's Insurance Commissioner looking at your books so that 
you can then go to Florida consumers and say, ``We've got a 
good housekeeping seal of approval, our books have been opened 
to the State of Florida,'' rather than litigate the matter?
    Mr. Freedman. Senator Martinez, Coventry does strive to be 
in compliance with the laws, and particularly the laws in 
Florida. As you referenced, the Office of Insurance Regulation 
came to our company following the New York civil matter. They 
came and investigated, looked at the company, concluded that 
investigation, as you indicated, with the consent order. There 
was a reimbursement for the costs of that investigation. There 
was no finding of wrongdoing, there was no penalty, there was 
no fine.
    They did come and say, ``We want to do a market conduct 
exam.'' As you can imagine--
    Senator Martinez. You did agree to a business practice 
enhancement plan?
    Mr. Freedman. Yes, sir. What we did in that is we 
provided--made permanent some voluntary improvements that we 
had made.
    Senator Martinez. Did you not also agree to future 
examinations?
    Mr. Freedman. Yes, sir. As the Department came to ask to do 
another examination, as you can imagine, our desire to comply--
sometimes it runs into conflict with other laws, in that 
providing information under Florida would cause us to be in 
violation of laws in other States, particularly with respect to 
disclosure of transactions that don't involve Florida 
policyholders, that would expose their sensitive personal 
medical and financial information from another State into 
Florida.
    We simply have asked--
    Senator Martinez. Would you agree to provide the 
information on Florida policies with Florida policy holders and 
Florida citizens?
    Mr. Freedman. Senator Martinez, yes, we did say that we 
would and we have provided that information on Florida 
policyholders already. The issue is a narrow one and it 
involves policy owners from out of State. We've asked the court 
to examine the Florida law on this matter.
    I think it's important to note that the Office of Insurance 
Regulation itself can't be entirely sure because they went to 
the legislature this year asking in a legislation for clarity 
on this one issue, saying, ``We want the State legislature to 
authorize us to look at out of State information.'' That 
legislation was introduced by the OIR to say--because they 
aren't sure. We aren't sure, that's why we asked the court.
    Senator Martinez. Have you taken a position on that 
legislation?
    Mr. Freedman. We have not taken a public position on that 
legislation. We have legislation in, as well, that would 
clarify the law that the State of Florida's regulation covers 
Florida policy owners, such as we've already provided to the 
OIR.
    Senator Martinez. Let me just say, in the State of Florida, 
we have a very large senior population, as everyone knows. In 
that population, over the years, Florida has been vulnerable to 
land schemes, to sub-prime lending, where we are leading the 
world in more troubled real estate--maybe competing for 
California for the lead. There's a lot about this that would 
have, on the surface, the appearance of some of these things, 
which have really required vigilance, legislation, and we've 
come a long ways in the State of Florida. I, as a Florida 
Senator, have to tell you that I am going to be very interested 
in going forward and how we can make sure the Florida citizens 
are well protected by this, as well as citizens across our 
State, I mean across our nation.
    Let me just ask one last question, Mr. Chairman, if you 
would allow me.
    The Chairman. Sure.
    Senator Martinez. The business of securitizing, as I was 
hearing the commentary from the prior panel about the 
securitizing of this business arrangement. It had an awfully, 
awfully similar sound and smell to the securitizing of sub-
prime lending.
    Sub-prime lending got us in a world of trouble. It all 
sounded great. I remember Fannie and Freddie telling me, ``We 
are bulletproof, there is no chance that we're going to ever be 
in trouble, because we are doing everything by the book, 
everything is great, ever-growing housing market,'' et cetera, 
et cetera.
    Can any of you address the issue of securitizing and 
whether, in fact--I mean, I'm concerned about brokers--it's the 
same thing, you see. There were brokers with very little 
disclosure with no clear path as to who they were really 
working for. Were they working for the seller, the buyer, the 
borrower, or none of the above, themselves, where they were 
getting a fee? We're talking about middle people that were not 
clear to anyone in the transactions, of which there was no 
transparency, banks that were making the loans, brokers that 
were securing them, passing them off to someone else who would 
then securitize them, bundle them, sell them into a marketplace 
that included the world. No one was asking the questions, but 
at every step of the transaction, everyone was getting a very 
healthy bite.
    So, everything was good, life was good until it wasn't. A 
result of that, we have had TARP, we have got the rescue of 
Fannie and Freddie at great cost to the Federal Government. I'm 
not suggesting that this is the same thing, it just smells and 
sounds an awful lot like it. I would like for each of you to 
address that issue.
    Mr. Avery. Thank you, Senator Martinez, I'll go first if I 
may.
    You're right to point out the analogy that there are some 
common ingredients. First off, the one common ingredient is 
that most of the intermediaries are paid up front to do the 
transactions, so the essence is on get the transaction done. If 
you understand at the end of the day the investor is expecting 
to get above market return, the only way you can get above 
market return is someone has to give up value. So in these 
transactions, for there to be a winner, there must be a loser.
    The question is, is it the senior citizens who's giving up 
value in their policy or is it the insurance company who is 
being misled with misinformation on the issue of the policy or 
being arbitrage. So the question long-term will be, who is it 
that's giving up value and how serious will that be.
    To your point, it is very possible that at the end of the 
day that the investors who are buying up these life insurance 
contracts once they're pooled, and some of these investments 
are in fact held in qualified pension plans, which seniors are 
depending on for their retirement value, could wind up, that if 
the lives insured live longer than were expected by whoever's 
evaluating these policies to determine value, that these 
investments will not be worth what they think they are and that 
the investors are going to have to continue to pay the premium 
required on the life insurance to wait for the ultimate death 
benefit, or decide that it's a bad investment and have it go 
under.
    So, some of your analogy absolutely applies, and it applies 
to both the investor, the insurance company, and at times, the 
senior citizen.
    Thank you.
    Senator Martinez. Mr. Peden?
    Mr. Peden. I'm afraid I'm going to have to disagree with 
Mr. Avery's characterization, primarily because, as he should 
know, when a policy is issued, it has inherent value. It's a $5 
million policy because it says on the front of it, it's a $5 
million policy. That is completely different than in the sub-
prime characteristic where it was a market-related type of deal 
because of the--the value of houses and that sort of thing.
    Senator Martinez. But they had appraisals, there were 
appraisals on the houses.
    Mr. Peden. That's true, they had appraisals, but that's 
still dependent on the appraiser. In this particular instance, 
you know that the policy itself has a future value of $5 
million, it has inherent value.
    Senator Martinez. I'll agree with that.
    Mr. Peden. It is asset-based instead of market-based kind 
of investment. We do not actually securitize policies and ship 
them off like that, however I would say that because of the 
nature of these policies, because they are secure, these are 
issued by some of the most well financed and financially solid 
companies in the United States and in the world, that it is a 
much better type of investment and would actually be able to 
shore up some other kinds of asset or funds that are not doing 
so well. I would much prefer to own this kind of asset because 
it is asset-based rather than investment-based.
    Now, in the case you're referring to, with regard to 
securitization and that sort of thing, obviously there are 
areas, of course, securities laws when it referred to that and 
still apply to that, and I appreciate the opportunity to draw a 
distinction, which Mr. Joseph neglected to mention, with regard 
to the settlement of the issue of Life Partners in our State.
    Mr. Joseph, apparently, and the State of Colorado did not 
like the United States Court of Appeals decision, holding that 
our transaction was not a security, and so they changed the 
law, going against what Federal law was. One of the things he 
was--his commission did acknowledge though, was that no 
investor has alleged or asserted any impropriety against 
defendants with respect to their investments.
    I wanted to make sure that the Committee was aware of that, 
that there was no allegations of fraud in that regard, just 
simply a law school question as to the design of the 
transaction.
    Getting back to what we're talking about here, with the 
securitization, I think that it's important--many of the States 
law now, with regard to brokers, it's very apparent and it's 
very clear who the broker is representing. I'm very proud that 
I actually drafted much of the legislation that was picked up 
by a lot of the States that says, ``There is a fiduciary duty 
by the broker,'' irrespective of how he's paid, whether it's by 
fee or taken out of the proceeds or however it is, he has a 
duty as one master, and that is the person who is selling the 
policy.
    We, on the other hand--
    Senator Martinez. I would submit to you that his master is 
who pays him--
    Mr. Peden. Well--
    Senator Martinez [continuing]. At the end of the day.
    Mr. Peden. Well, the thing I think is important is, the law 
imposes that fiduciary duty on him, whether--whether it comes 
out of the--out of the deal--
    Senator Martinez. But if it's contrary to financial 
incentives, I think that's always problematic.
    Mr. Peden. Well, I would certainly agree and I think that 
being able to put that into codified legislation is important. 
Because you are right, it is important to see who the broker is 
representing. The broker should be representing one party, the 
person selling the policy.
    On the other side of the transaction, are provider 
companies like Mr. Freedman's and mine, and we are on the buy 
side of that. We're friendly, we get along with the brokers, 
but at the end of the day, we represent different parties and 
so there is a fair transaction in that regard.
    Senator Martinez. That makes sense, that makes sense.
    Mr. Freedman, just to conclude.
    Mr. Freedman. Yes, Senator Martinez, you probably have 
heard enough on that issue. I simply would address one aspect 
of it. You alluded to the, with respect to securitization, 
these policies are moved along in--
    Senator Martinez. Right.
    Mr. Freedman [continuing]. In the transactions, in the 
secondary, tertiary markets.
    One the things that was stated earlier, but needs 
correction, is that when a policy holder sells their policy, 
one of the standard disclosures that's provided and one of the 
requirements in those, and that we support, is that policy 
owners and the insureds in those policies know who owns those 
policies, even beyond the initial sale of the policy by that 
person, that the insured be notified within a short period of 
time of any subsequent ownership of the policy.
    They're told of that at the--before they enter the 
contract. If they don't want the policy sold, again, they can 
say, ``We just don't want to do this transaction.'' They're 
aware of that, that's an affirmative position that they take, 
it's a disclosure that they are provided. That also carries 
with that policy protections, which we've maintained are very 
important, that their information be protected throughout the 
stream of commerce.
    Senator Martinez. That's a good point for you to make.
    Mr. Peden. Mr. Martinez, our contracts say the same thing, 
as well.
    Senator Martinez. Thank you all very much.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Martinez.
    We have Senator Udall with us today. Thank you for being 
here, Senator Udall.
    Senator Udall. Thank you, Mr. Chairman. This is an 
important set of topics. I want to thank you for holding this 
hearing, and in particular for your focus on shielding 
consumers and investors from fraud, abuse, and deception. We've 
learned quite a great deal here today about the potential for 
that in these instruments.
    Senator Martinez, thank you for your questions and I want 
to associate myself with your remarks in pushing for 
transparency. I think you have particular expertise and insight 
given, as you point out, your State and its history and its 
population.
    I want to also thank Commissioner Joseph he served on the 
first panel. We're proud of the work he's done in Colorado. I'd 
say to Mr. Peden, he's not perfect, but I think Commissioner 
Joseph really has operated in his professional life with the 
interest of consumers up front and center. I know there are 
times when well meaning and well intentioned people and 
organizations have a difference of opinion.
    If I might, I'd like to direct a question, first to Mr. 
Freedman. In your written testimony you indicated the extent 
that Coventry believes in strongly protecting consumer privacy 
with regard to those transactions. I'd like you to explain in 
detail, and with examples although you may want to submit some 
of that for the record, of the safeguards you've taken to 
protect the financial and medical information of policy owners 
and insureds.
    Additionally, could you share with the Committee what 
steps, if any, you've taken to ensure that policy holders are 
not being contacted by third parties to inquire about their 
health status. We've certainly heard those stories.
    Mr. Freedman. Senator Udall, I thank you for the question. 
Coventry does value the privacy of individuals, both owners and 
insureds, of their medical information, of their financial 
information. Our company has sophisticated technology, you 
know, in software, encrypted in order to maintain that within 
our own systems, closed systems so that they aren't able to be 
released. Our company also limits the disclosure of private 
information to future investors, investors in policies, 
limiting and retaining the ability to prohibit the use of that 
information or the release of that information to individual 
investors, so that only sophisticated investors such as some of 
the investors in the market, banks, insurance companies, people 
that know how to handle and are used to handling sensitive 
personal, medical, and financial information are doing so.
    We also support the regulations that are being adopted 
around the country that require the maintenance of privacy--of 
that type of information, medical and personal information, 
both from our transaction throughout the life of the policy.
    We also support and maintain that the limitations on 
contacts, that are found in most State laws, that are limited 
to contacts with either the insured or the insured's 
representative, which is usually the case, a designated 
representative to check on the health status, to maintain 
that--that contact, limited to--not frequent contacts, but 
relatively infrequent contacts.
    Senator Udall. I'd like to follow up after the hearing with 
some additional questions and ask you to generate some 
examples. I know there have been cases where third parties have 
called, trying to get a sense of when a life insurance policy 
might pay off and I think we all, at least I certainly do, view 
that situation with some horror and distaste. So, if we could 
follow up with you, I'd like to do so.
    Mr. Freedman. Yes, Senator.
    Senator Udall. If I might, in reading Mr. Avery's 
testimony, Mr. Freedman's testimony, you both have a strong 
aversion, it appears to STOLIS. Is there anybody who supports 
STOLIs and is there any time at which that would be an 
appropriate insurance instrument?
    Mr. Avery. I think, Senator, when people are asked the 
question you just posed, whether they support STOLI, I think 
everyone today says uniformly that they do not. That was not 
true in the early days of STOLI. However, defining what is 
STOLI and having a bright line is very difficult and that's why 
we're pushing for regulation that clarifies that.
    For example, there are instances where a consumer will buy 
a policy, and as long as there's no written agreement, even if 
they were to sell the policy six months later, when they had 
the intention to sell it. We would argue that's STOLI, others 
would argue, no, that's their property right to do so. We think 
whenever there's an inducement to purchase a life insurance 
contract with the thought that it will be sold, generally after 
the contestability period nowadays, that that is STOLI. So it's 
around the definition of what is STOLI. It's what is.
    Senator Udall. Mr. Peden.
    Mr. Peden. Thank you, Senator. The problem that Mr. Avery 
brings up is that you can not adequately or prove, in an 
empirical fashion, what the intent of someone was. If I buy my 
house today for, say $100,000 and tomorrow somebody offers me 
$200,000 for it, that sounds like a good deal. I didn't have 
the intent to sit on it or I may have to live in the house 15 
years before it appreciates that much. So it's difficult to say 
what the intent of the individual was.
    There is no question, however, in the law, that if there is 
a contemporaneous to sell the policy at the time the policy is 
taken out, that is STOLI and that is something that I don't 
think anyone here supports. So we would join that as well, of 
course.
    Senator Udall. Mr. Freedman.
    Mr. Freedman. Senator Udall, thank you. As everyone has 
said, STOLI is bad. As I've testified earlier, it harms the 
consumers and it harms the insurance companies, it harms our 
business as well, the secondary market.
    As Mr. Peden said, it--first, as Mr. Avery said, there 
needs to be a bright line and that bright line is clearly 
established, that the person who is taking out the policy has 
to have an insurable interest. That bright line is established 
that there not be fraud in the application or the issuance of 
the policy. It was also stated, that there not be an 
inducement. Those are clear, bright line standards.
    Where the schemes have come up, the National Conference of 
Insurance Legislators have said, ``We're going to find those 
schemes, we're going to define those schemes and we're going to 
attack those schemes.'' That's the way to do it, and we think 
that's been successful as States are adopting that model.
    Senator Udall. I know you've all suggested there is some 
difficulty in defining a STOLI versus an insurance instrument. 
We all agree a clear definition is necessary and appropriate.
    Knowing the Chairman as I do and knowing the ranking member 
as I do, they're going to continue to work to find that 
definition, because when this is subject to abuse, it's just 
not acceptable, it's flat out not acceptable. So, we'll 
continue, I know, to work with you and also insurance 
commissioners and other experts draw that bright line in a 
clear way.
    Mr. Peden, if I might, I'd like to come back to the 
interchange you had with Senator Martinez when you talked about 
the difference between asset-based and investment-based 
securities. You said that when $5 million is on a life 
insurance policy, that's backed up and that $5 million will be 
forthcoming.
    I'm still curious, and I think the Senator was--was on an 
important line of questioning, and I think what he was trying 
to get at is where is that $5 million held, where is that $5 
million payout going to come from. Because you still are using 
leverage, insurance companies still utilize that approach, 
after all, the money is going to be invested elsewhere to 
generate a return. I think, Senator Martinez, you were on to 
something, to ensure that the face value is actually going to 
be paid out. Could you comment, perhaps the rest of the panel 
would like to as well.
    Mr. Peden. Certain and thank you very much for the 
question. Senator Udall, I think that--it's important to 
recognize that--I beg your pardon--it's important to recognize 
that the--the solvency and the solidity of the insurance 
companies whose policies are purchased in a life settlement is 
extremely important. We rely not only on the applications, 
which individuals complete with regard to their financial 
capacity and other representations they make in that, but also 
with regard to the oversight which the various States issue on 
these policies--these companies.
    We want to make sure that they maintain their high ratings 
because--you asked where the $5 million comes from. It comes 
from Prudential or Northwestern Mutual or any of the other 
insurance companies that are out there. These are all extremely 
large insurance companies. They have to be because only a large 
insurance company can issue a large-face policy.
    Now I can't speak to other companies because we only buy 
policies from sophisticated individuals who, as I said, the 
faces are usually $1 to $10 million. So, the quality of the 
insurance company is quite, quite good. What we want to see is 
a very healthy and remaining healthy insurance industry, but 
one which does recognize and does not impede the rights of 
individuals to see their policies when those policies become 
obsolete. Those are the kinds of situations that we're talking 
about and that is the niche which life settlements fills.
    Senator Udall. Mr. Avery or Mr. Freedman, you don't have to 
comment, but if you'd care to.
    Mr. Avery. I'd be glad to, Senator. We certainly agree with 
Mr. Peden that the large life insurance companies are sound, on 
a solvent basis, and we appreciate the fact that he wishes we'd 
remain sound, but you go back to my issue about that if the 
investor is going to get an above market return, it's coming 
from somewhere and someone. If a certain industry undertakes 
certain actions that cause that to happen, then does question 
long-term run the solvency of that.
    So, in my own case at Prudential, one of the reasons we 
want to be sure we're not participating in the STOLI 
transactions, which we think are arbitraging the pricing of 
policies, we want to make sure that we're not writing those 
policies because we intend to remain solvent a long time.
    Senator Udall. Mr. Freedman.
    Mr. Freedman. Senator Udall, really just taking from the 
two other gentleman, that there is a value and that value is 
being paid to consumers. The value may be being paid by 
carriers as a result of a secondary market transaction to a 
life settlement company or to an investor, but the value that 
the policy holder receives is what's really at stake. Are they 
taking a cash surrender value, are they taking a market value, 
and are they getting that value through the types of 
transparent transactions that we support?
    I really would just close with, my--at least my response 
with, I want to refer to the 1886 Wisconsin Supreme Court 
decision that said that--the court said that they were not able 
to perceive why the holder of a valid policy should be 
prevented from realizing the value of the same to him, before 
his death, by a bona fide sale or assignment thereof. Such a 
sale or assignment may be, in fact, absolutely necessary in 
order to get any benefit of his policy. That's what's protected 
in their ability to sell that, for them to get that value.
    So, the attack--the issue of getting that value is in the 
hands of the consumer, a competitive market gives them value, 
carriers may choose to give consumers that value or they'll 
wind up giving it to the secondary market.
    Senator Udall. Thank you, all three of you, for those 
explanations. I--in reading the testimony, it is fascinating, 
the case law around insurance products. It's tens of years, 
decades and longer, and we, of course, have a responsibility to 
pay attention to the case law, but as these products evolve we 
also have a responsibility to consider what might be happening.
    We know in Washington all to well, that credit default 
swaps are a form of an insurance product, a very fancy and 
convoluted and complex insurance product, and they are part and 
parcel of the reason that we've had some very tough votes and 
very tough decisions over these last number of months.
    So, thank you, Mr. Chairman. Thank you, Ranking Member.
    The Chairman. Thank you very much, Senator Udall.
    Any other comments from the panel or Senator Martinez?
    You've rendered a real public service in being here today. 
The life settlements industry needs our attention and it will 
get it. Thank you so much.
    [Whereupon, at 3:40 p.m., the hearing was adjourned.]
                            A P P E N D I X

                              ----------                              


 Florida Office of Insurance Regulation Response to Senator Specter's 
                                Question

    Question. I have read a copy of the attached letter, dated 
May 8, 2009, from Michael Freedman, Senior Vice President, 
Coventry, to Senate Special Committee on Aging Chairman Kohl 
and Ranking Member Senator Martinez regarding the testimony of 
Mary Beth Senkewicz, Deputy Insurance Commissioner, Florida 
Office of Insurance Regulation, to the Special Committee on 
April 29, 2009. Ms. Senkewicz testified to the Committee that 
``Coventry refused to file an Annual Report for the period 
ending December 31, 2008, as required by Section 626.9913(2), 
Florida Statutes.'' But the letter she signed on March 10, 2009 
states that Coventry's filing ``fulfills Coventry's obligations 
under Section 626.9913(2), Florida Statutes for calendar year 
2008.''
    I am interested to learn how you can reconcile the apparent 
conflict between Ms. Senkewicz's testimony to the Committee and 
her statement in the letter she sent to Coventry on March 10, 
2009?
    Answer. Please refer to our response to the letter 
submitted to Chairman Kohl and Ranking Member Martinez by 
Michael Freedman on May 8, 2009.
                                ------                                


              ACLI Response to Senator Specter's Question

    Question. I have received a copy of the April 15, 2009 
letter from the Life Insurance Settlement Association to 
Senator Kohl (attached) in which, among other things, the 
Association states that `[u]fortunately, rather than compete 
against life settlements, insurers have engaged in a concerted 
effort to impair and inhibit the ability of American seniors to 
access the value of their life insurance assets. In this 
effort, insurers have sought to interfere with consumer rights 
under the contract of insurance, limit information and, 
egregiously, provided false and misleading information that has 
led many seniors to drop their policies without the benefit of 
knowing about the true market value of their policies.'' The 
letter contains both general and specific allegations, 
including that insurance companies have;

    fired agents for counseling clients about the secondary 
market;
    made false statements about life settlements and life 
settlement companies;
    provided misinformation to policy owners;
    pressured competing insurers to boycott premium finance 
loans;
    sought to rescind policies sold in the secondary market;
    imposed contractual restrictions on policy sales; and
    refused to issue policies when a prospective insured 
indicates having discussed life settlements with his or her 
agent.''

    What are your recommendations on how to protect consumers' 
in life settlement transactions against efforts that would 
impair consumers' access to information or assistance about 
life settlements?
    Answer. In addition to the many excellent recommendation 
offered during the Committee's hearing of April 29, the ACLI 
recommends that the states faithfully enact the provisions of 
the NAIC Viatical Settlements Model Act or the NCOIL Life 
Settlements Model Act that require settlement disclosures to 
policy owners.\1\ These disclosures were adopted by the expert 
insurance regulators and expert state legislators, 
respectively, after New York and Florida authorities found 
pervasive fraud in the business practices of settlement brokers 
and providers.\2\ The nature of the fraud included systematic 
breaches of fiduciary duty, conflicts of interest, 
unconscionable payments to settlement middle-men often in 
excess of the amounts paid to the consumer for his insurance 
policy, and questionable use of the consumer's personal 
information. Faithful adoption of the consumer protection 
provisions of the model laws will protect consumers' access to 
information with respect to life settlements, such as:
---------------------------------------------------------------------------
    \1\ NAIC Model 8 and NCOIL Model 9.
    \2\ See People of the State of New York v. Coventry (New York 
Supreme Court No. 404620/06, filed October 2006; Denial of motion to 
dismiss and reinstatement of action for common-law fraud Ordered by 
Supreme Court Appellate Division at 2008 N.Y. Slip Op. 05548 (June 17, 
2008)). The New York findings were corroborated by similar findings by 
insurance officials in Florida Office of Insurance Regulation v. 
Coventry (Order Show Cause No. 88270-06, resolved October 2007) (Order 
requires Coventry pay Florida $1.5m plus submit to special compliance 
audits until 2009 as well as specially report all Florida resident 
transactions quarterly and more).
---------------------------------------------------------------------------
    There are alternatives to settlements including 
accelerated death benefits or policy loans offered under the 
insurance contract;
    A settlement broker represents the consumer exclusively 
and owes a fiduciary duty to the consumer;
    Some or all of the proceeds of the settlement may be 
taxable and tax assistance should be sought;
    Proceeds from a settlement could be subject to the claims 
of the consumer's creditors;
    Receipt of settlement proceeds could affect the consumer's 
eligibility for Medicaid or other government benefit or 
entitlements, and advice should be sought from government 
authorities;
    The consumer has a right to rescind a settlement contract;
    Funds will be sent to the consumer within three days of 
transfer of the insurance policy or its benefits to an 
investor;
    A settlement may forfeit or affect other rights or 
benefits of the insurance policy, such as conversion rights;
    Medical, financial or personal information about the 
consumer obtained by settlement providers or brokers--including 
personal identity information--may be disclosed to investors as 
necessary and often;
    The consumer may be contacted as often as once a month 
following settlement of his insurance policy to determine the 
consumer's health status and confirm his address and telephone 
number;
    Whether there is any affiliation between the settlement 
provider and the issuer of the insurance policy;
    The contact information of the settlement provider;
    Whether there is any affiliation between the settlement 
provider and investor purchasing the consumer's policy;
    The possible loss to the consumer of coverage on other 
lives if the policy is a joint policy or has family riders to 
the policy;
    The dollar amount of the death benefit, guaranteed 
insurance benefits, accidental death and dismemberment benefits 
that might be lost to the consumer by the transfer of the 
policy;
    Where and with whom the consumer's funds will be escrowed 
pending completion of the settlement transaction;
    The contact information of the settlement broker;
    All offers and counter-offers made for the consumer's 
insurance policy;
    Whether there is any affiliation between the settlement 
broker and any person making an offer to buy the consumer's 
policy;
    The amount and method of calculating the compensation paid 
to the broker from the value received for the consumer's 
policy;
    The total amount of the settlement broker's compensation; 
and
    The change in ownership of the consumer's policy if the 
settlement provider transfers it to another stranger or changes 
the policy beneficiary.\3\
---------------------------------------------------------------------------
    \3\ The NAIC Model has additional protections for consumers who are 
purchasers of settled policies. See NAIC Model 8E, F and G.

    Enactment of these disclosures will substantially protect 
consumer's access to information or assistance about life 
settlements in the settlement transaction.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                               Exhibit G

    See Page 121 through 139 for Exhibit G

    State of Florida Division of Administrative Hearings

    Life Insurance Settlement Association, Petitioner vs. 
Financial Service Commission and Office of Insurance 
Regulation, Respondents

    Case No. 09-0386RP

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
                                 
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