[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 ---------- U.S. GOVERNMENT PRINTING OFFICE 51-547 PDF WASHINGTON : 2009 For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC area (202) 512-1800 Fax: (202) 512-2250 Mail: Stop SSOP, 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 ---------- 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:] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 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:] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 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:] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 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]