[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
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Page
Opening Statement of Senator Herb Kohl........................... 1
Statement of Senator Mel Martinez................................ 3
Panel I
Statement of Stephan Leimberg, CEO, Leimberg Information
Services, Inc., Havertown, PA.................................. 4
Statement of Mary Beth Senkewicz, Deputy Commissioner, Life and
Health Insurance, Florida Office of Insurance Regulation,
Tallahassee, FL................................................ 17
Statement of Michael McRaith, Director, Division of Insurance,
Illinois Department of Financial and Professional Regulation,
Chicago, IL.................................................... 33
Statement of Fred Joseph, Commissioner, Division of Securities,
Colorado Department of Regulatory Agencies, Denver, CO......... 47
Panel II
Statement of James Avery, Jr., President, Individual Life for
Prudential Financial, Newark, NJ............................... 65
Statement of Scott Peden, President, Life Partners, Incorporated,
Waco, TX....................................................... 78
Statement of Michael Freedman, Senior Vice President, Government
Affairs, Coventry, Fort Washington, PA......................... 87
APPENDIX
Mary Beth Senkewicz, Florida Office of Insurance Regulation
Response to Senator Specter's Question......................... 105
James Avery, ACLI Response to Senator Specter's Question......... 105
Summary of Committee Investigations submitted by the Aging
Committee Majority Staff....................................... 107
Additional information from Coventry............................. 118
Additional information from Mary Beth Senkewicz, Office of
Insurance Regulation........................................... 140
Letter and additional information from the State of Wisconsin,
Office of the Commissioner of Insurance........................ 189
Letter from the National Conference of Insurance Legislators..... 194
Letter from the Life Insurance Settlement Association............ 196
Letter from the Association for Advanced Life Underwriting....... 209
Statement from The National Association of Insurance and
Financial Advisors (NAIFA)..................................... 211
Testimony of Mary Jo Hudson, Director of the Ohio Department of
Insurance...................................................... 215
Statement of Joseph M. Belth, Professor Emeritus of Insurance in
the Kelley School of Business at Indiana University............ 225
Testimony submitted by the State of New York Insurance Department 230
(iii)
BETTING ON DEATH IN THE LIFE SETTLEMENT MARKET: WHAT'S AT STAKE FOR
SENIORS?
---------- --
WEDNESDAY, APRIL 29, 2009
U.S. Senate,
Special Committee on Aging,
Washington, DC.
The Committee met, pursuant to notice, at 2:09 p.m. in room
SD-106, Dirksen Senate Office Building, Hon. Herb Kohl
(chairman of the committee) presiding.
Present: Senators Kohl [presiding], Udall, and Martinez.
OPENING STATEMENT OF SENATOR HERB KOHL, CHAIRMAN
The Chairman. Good afternoon to everybody, and thank you
very much for coming to this hearing this afternoon.
In today's tough economic climate, millions of seniors have
lost a big part of their retirement and investments in only a
matter of months. Unlike younger Americans, they do not have
time to wait for the markets to rebound in order to recoup a
lifetime of savings.
For many, this means postponing retirement, or even
returning to work in a difficult employment market, often
staked against older workers. Needless to say, seniors are
looking for ways to bolster their sagging savings.
Often they find that the most valuable asset they can
afford to part with is their life insurance policy, which can
have substantial cash value. New alternatives have become
available for those who no longer have a need for their life
insurance policy.
One of them is the life settlement business, a burgeoning,
multi-billion dollar industry that has exploded in recent
years. Life settlements can be a worthy alternative for seniors
who are considering the sale of their life insurance policy,
and offer a higher payment in the cash surrender value offered
by the insurance company.
Today, we're here to inform seniors that selling one's life
insurance policy is a complex transaction that can be filled
with hidden pitfalls.
Over the last 9 months, Committee staff interviewed many
honest and competent players in this industry. But as with any
industry that balloons over a short period of time, there are
sales practices and regulatory loopholes that need to be
examined in the interest of seniors and consumers, at large.
Several State regulators are here to talk about the sales
and marketing abuses that they have seen at the hands of life
settlement brokers, who--in some cases--received huge
commissions.
Many States, including my own State of Wisconsin, are
working to implement legislation, or State regulations that
would institute consumer safeguards. Initiatives include a
requirement that brokers be licensed to sell life settlements,
the establishment of guidelines for sales, marketing and
promotional materials, and the mandatory disclosure of certain
risks.
For example, most seniors do not know that when they sell
their policy, their health records can be passed off to
multiple third parties as their policy is resold, time and
again.
Most seniors are also unaware of what their tax liabilities
are, or that they may be uninsurable in the future.
Furthermore, most seniors may not know that they are
participating in insurance fraud if they purchase life
insurance with the intent of flipping it for a life settlement.
Known as ``stranger-originated life insurance,'' or STOLI,
such scams have led to a spike in litigation since 2005. In
Florida alone, insurers have filed three multi-million dollar
Federal lawsuits in the past year, alleging that the true
nature of the life insurance transactions were misrepresented.
We'll also examine how life settlements are being bundled,
and sometimes used as risky investments by some of America's
largest investment companies.
We'll hear about the risks associated with purchasing
investments backed by life settlements, and explain why they
are not generally considered suitable for non-institutional
investors.
As States struggle to increase regulations and consumer
protections, it's crucial that the Federal role is made clear.
I've sent a letter to the IRS, asking them to clarify the Tax
Code with respect to life settlements, as the current lack of
guidance may be creating loopholes. In a reply, Treasury
Secretary Geigner stated that the Agency will soon publish tax
guidance for people who sell their policies, and the investors
who purchase them.
We've also asked the Securities and Exchange Commission to
state its position on whether life settlement investments
should be considered securities, as most State regulators are
treating them. Mary Shapiro, Chairman of the SEC, responded
last night and clarified the SEC's jurisdiction over most
aspects of life settlement transactions. She also assured us
that they will look into the regulation of life investment
brokers.
Finally, we've asked the Government Accountability Office
to study the current size and scope of the life settlement
market, and take a look at related consumer issues, as it's
clear that the industry is in need of more transparency and
regulation, and we may be introducing legislation to address
this issue.
We thank you once again for being here today, we thank our
witnesses for being here today. We now turn to Ranking Member
Mel Martinez, for his opening statement.
STATEMENT OF SENATOR MEL MARTINEZ, RANKING MEMBER
Senator Martinez. Chairman, thank you very much, and thank
you for calling this very, very important and timely hearing.
In today's turbulent economic environment, we want to
preserve and protect seniors' assets and their liquidity
options, as well.
We also want to ensure that primary and secondary financial
markets are safe, transparent, efficiently regulated, and
inspire investor confidence.
I'd like to thank our panelists for joining us today to
discuss issues impacting those contemplating a transaction
involving life settlement firms. I'm also looking forward to
hearing what States are doing to bolster investor protection in
the wake of several life settlement firms being exposed as
fraud schemes.
It is my hope that we can bring greater attention to
matters regulated by the States, to ensure both investor, and
consumer, protection.
We'll also hear today from two firms engaged in the
business of life settlements, and what they envision for their
future, and the future of their industry. Speaking of what
steps Congress, the States and regulators can contemplate to
ensure consumers are fully appraised of their rights, and their
obligations under such transactions.
Also important to this committee is a complete discharge of
fiduciary duties on the part of brokers and providers.
Seniors should have comfort that they're receiving the best
value for their assets, and this opaque life settlement market.
They also deserve full accountability and transparency when
engaging in these types of transactions, and we will be
monitoring practices as we go forward.
Businesses practices, such as stranger-originated life
insurance policies--or STOLIs, as mentioned by the Chairman--in
my view are contrary to the fundamental precepts of the
insurance market, and we would appreciate more on how to
prevent these types of transactions.
We also need to learn the real-world task practices
surrounding these life settlement transactions, including the
gains on sale, the taxability of the death benefits, and the
fair and equitable treatment of all tax filers.
Mr. Chairman, I want to ensure that those with a tax
liability as a result of one of these transactions, No. 1, pays
all of the taxes that they owe, and No. 2, that they be treated
consistently, without regard to who prepared their return. In
other words, I'd like to see a strong guidance from the IRS,
and appropriate clarification, so that there is no ambiguities
as to who owes what at what time.
I look forward to learning more from today's witnesses, and
thank them all for appearing here with us today. Thank you.
The Chairman. Thank you, Senator Martinez.
We'd like now to introduce the members of our panel.
Our first witness on the first panel today will be Stephan
Leimberg, CEO of Leimberg Information Services, which does
provide analysis and commentary for financial services
professionals. He is also CEO of an estate and financial
planning software company. Mr. Leimberg has written and
lectured extensively on the topic of life settlements, premium
financing, and stranger-owned life insurance.
Welcome.
Our next witness will be Mary Beth Senkewicz, the Deputy
Commissioner of Life and Health of Florida's Office of
Insurance Regulation. Ms. Senkewicz formerly served as Senior
Health Policy Counsel, and Legislative Advisor to the National
Association of Insurance Commissioners for over 11 years. She
received her law degree from St. John's University in New York
City.
Next we'll be hearing from Michael McRaith, the Illinois
Director of Insurance. Mr. McRaith has led several high-profile
insurance fraud investigations for the State of Illinois. He
belongs to the National Association of Insurance Commissioners
Senior Issues Task Force, and has testified before numerous
Congressional committees on insurance-related topics, including
marketing and sales abuses by Medicare Advantage, and
prescription drug plans.
Finally, we'll be hearing--on the first panel--from Fred
Joseph, the Securities Commissioner for the State of Colorado.
Mr. Joseph oversees the regulatory agency that licenses stock
brokers, brokerage firms, and investment advisors in Colorado.
He's also President of the North American Securities
Administrators Association, whose mission is to protect
consumers who purchase securities, or investment advice.
So, we welcome you all here today and we'd be delighted to
take your testimony at this time.
Mr. Leimberg.
STATEMENT OF STEPHAN LEIMBERG, CEO, LEIMBERG INFORMATION
SERVICES, INC., BRYN MAWR, PA AND AMELIA ISLAND, FL
Mr. Leimberg. Legitimate, appropriate life settlements can
benefit seniors. But I've been asked to discuss abuses. Here
are six.
First, no State requires a holdfold analysis. There's no
mandatory testing to see if a seller should ``hold''--that is,
keep, or ``fold''--that is, sell a policy. Without analysis,
existing life insurance may be stripped away from a family when
it should be kept.
Second, rogue brokers, unscrupulous settlement companies
rig bidding on policies. Sellers are cheated.
Third, few States have modern settlement laws--it's
patchwork. Laws aren't close to being uniform. So, rogue
brokers change the legal location of a transaction to avoid a
tough State's laws. They move it to a lesser-regulated State,
or to one with no law. Forty-two percent of all 2008
settlements were in States with no settlement law.
Fourth, disclosure. State regulators don't have authority
to require needed information on settlement companies'
ownership, operations, conduct, security, and any fraud
procedures. Regulators have even been sued by big settlement
companies who bully them from obtaining information essential
to protecting seniors.
Fifth, no State--let me repeat--no State specifically
restricts who can buy an existing policy on a senior's life.
Once it's sold, you have no say, no veto. There are no limits
on how many times a policy can be resold, or to whom. You'll
never know who will own the policy on your life. No State has a
staff that monitors buyers. So, you'll never be sure that the
contract on your life will not end up in the wrong hands.
Sixth, stranger-originated life insurance--STOLI. STOLI is
a bet by strangers, a wager on how soon someone will die.
Strangers can't legally buy insurance on a person's life, so
like a teenager who finds and pays a homeless person to buy
liquor, speculators line up, pay, and co-op seniors into lies
and misrepresentations. The intent? Trick insurers into
thinking the insurance is for the senior's family.
STOLI has already resulted in higher rates, stopped some
insurers from issuing policies to seniors at all, and encourage
seniors to aid and abet fraud. Unsavory settlement companies,
more clever than ethical, enable STOLI by lobbying legislators
to water down laws. Loopholes are inserted on the cynical
pretense of defending property rights. Whose property rights?
The very people co-opted into committing fraud to get the
policy.
What's needed? No. 1, make a holdfold analysis mandatory.
Require brokers to explain the advantages of keeping insurance.
Require them to show sellers how much insurance is still
needed. How can you make an informed decision that existing
insurance is not needed, and should be sold, if no analysis has
been performed? Require brokers to explain, in writing,
alternatives to a sale.
Second, demand transparency. Require brokers to disclose
all offers, require them to shop and show spreadsheet offers
from potential buyers. Sellers should be shown who was offered
their policy--let them see for themselves if the policy was
shopped competitively. Provide sellers a written statement, not
only of what they net, but what the other parties get, so they
can know if they're being taken advantage of. Require
settlement companies to provide more information to regulators,
not less.
Third, forbid individuals from buying policies. Restrict
the types of institutions that can buy policies, and monitor
them.
Fourth, mandate licensing and rigorous continuing
education.
Fifth, enact modern and more uniform settlement laws.
Prevent predators from taking transactions to States that let
them do whatever they want to do .
Six, give regulators broad examination and investigation
powers. Enable them, and empower them, to seek injunctions,
cease and desist orders, and impose meaningful fines and
criminal fraud penalties.
Seventh, stop STOLI. Use laws such as Iowa's, North
Dakota's, the laws that are proposed in Oregon.
My conclusion: insightful, effective law can't wait. Why
not? Because what is at stake is not merely a senior's money.
You can not--you must not--forget, we're talking about a wager,
a bet on a human's life. The sooner the insured dies, the
greater the investor's profits. If it is your responsibility to
develop, monitor, and enforce settlement laws, remember a
senior's life is, literally, in your hands.
[The prepared statement of Mr. Leimberg follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The Chairman. Thank you.
Ms. Senkewicz.
STATEMENT OF MARY BETH SENKEWICZ, DEPUTY COMMISSIONER, LIFE AND
HEALTH INSURANCE, FLORIDA OFFICE OF INSURANCE REGULATION,
TALLAHASSEE, FL
Ms. Senkewicz. Thank you, Mr. Chairman. Good afternoon, and
good afternoon Ranking Member Martinez, from the great State of
Florida.
My name is Mary Beth Senkewicz, I am the Deputy Insurance
Commissioner for the Florida Office of Insurance Regulation,
and on behalf of Commission Kevin McCarty and myself, I would
like to thank you for inviting me to discuss the life
settlement industry.
To begin with, there is nothing inherently wrong with life
settlements in and of themselves. It is well-settled law that
insureds have a legitimate property right in their properly
obtained life insurance.
In fact, the industry began with a noble purpose. The first
phase of these products began in the 1980's and were marketed
to AIDS patients who needed cash to defray medical expenses,
and gain access to life-prolonging drugs. The problem now is
the lack of transparency associated with these transactions.
For example, in Florida, the industry opposed a proposal
that would require a disclosure of all fees, including
commissions associated with the transaction. Another general
problem is that persons wanting to sell their policies have no
easy way of knowing if they are getting the best deal they can.
Our office has expended a tremendous amount of resources
regulating this industry. To put it into perspective, Florida
has issued licenses to 24 entities, which is now only 14
entities, due to revocations and surrendered licenses.
Since 1996, the industry has incurred 18 different legal
orders, 2 administrative complaints, and 11 examinations or
investigations resulting in additional consent orders, all with
accompanying fines and costs of $1.95 million. This is
especially egregious when considering this industry represents
only 14 of the 3,900 entities regulated by our office. Every
time we try to insert some transparency into the system, such
as the bill we proposed for the 2009 legislation to consider,
the industry fights us. We have also been sued several times
when we try to enhance transparency by rule.
Coventry First, LLC is a leader in this industry. After the
State of New York sued Coventry, accusing the company of bid-
rigging and other fraud in acquiring more than $3.6 billion
worth of life insurance policies, we conducted our own
investigation.
We then issued a Notice and Order to Show Cause, alleging
violations of the Florida insurance code, including using
fraudulent and dishonest practices, transacting business in bad
faith, and employing individuals shown to be untrustworthy or
dishonest.
Coventry denied the allegations, but ultimately entered
into a consent order agreeing to pay $1.5 million. Thereafter,
the Office notified Coventry of a follow-up examination.
Coventry moved for a preliminary injunction in Federal district
court, arguing that our office does not have the authority to
examine its policies that relate to violators who reside
outside of Florida.
On March 31, 2009, the Federal Court ruled in our favor,
explicitly recognizing the State of Florida's rights to examine
all of Coventry's books and records in order to evaluate its
business practices as a whole. Coventry has appealed that
decision.
The newest development is called stranger-originated life
insurance, or STOLIs. These transactions involve private
investors soliciting elderly persons before they purchase a
life insurance product. These promoters entice seniors to buy
life insurance they might not otherwise have purchased. The
motivation for seniors is not to access funds, but to profit on
their ability to buy life insurance.
But these transactions may harm seniors--they may exhaust
their life insurance purchasing capability, and the cash
payments for selling their policy might subject them to an
unexpected tax liability. Seniors may also have to give the
investor, and subsequent investors down the line, access to
their confidential medical records.
In conclusion, generally speaking, the life settlement
industry needs far more transparency than it currently
possesses. In particular, STOLIs provide little public benefit,
or satisfy any legitimate financial need in the marketplace.
These transactions exist solely to manufacture life insurance
policies for profit. Those transactions can expose seniors to
potential tax liabilities, policy rescissions, and traumatic
litigation. These transactions subvert the original purpose of
life insurance.
Thank you.
[The prepared statement of Ms. Senkewicz follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The Chairman. Thank you, Ms. Senkewicz.
Mr. McRaith.
STATEMENT OF MICHAEL MCRAITH, DIRECTOR, DIVISION OF INSURANCE,
ILLINOIS DEPARTMENT OF FINANCIAL AND PROFESSIONAL REGULATION,
CHICAGO, IL
Mr. McRaith. Chairman Kohl, Ranking Member Martinez,
committee staff, thank you for inviting me to testify today.
I'm Michael McRaith, Director of Insurance in the State of
Illinois, and I speak today in that capacity.
I congratulate this committee and the staff for focusing on
the plight of our aging friends and neighbors who may fall prey
to abusive life settlement practices. In 2007, Illinois had
more than 6.9 million individual life policies in force, and
nearly 197,000 group policies, accounting for more than 5
million individual certificates.
For us, the importance of life settlement regulation and
transparency can not be overstated. Some argue that life
settlement regulation illustrates a pro-insurance industry
bias. This is false. It is not one industry versus another, the
issue is consumer protection.
To be clear, life settlements can be beneficial to
individuals whose circumstances have changed, perhaps through
divorce or terminal illness. When evaluating sales and
marketing practices, our discussion must account for the
retiree who worked hard, raised a family, saved whatever
possible, but is not legally or financially sophisticated.
With postponed retirements and depleted portfolios, and
often with few employment options, our seniors need protection.
Unwitting seniors may seek income through a stranger-owned life
insurance scheme that imposes unexpected taxes, or lost public
benefits.
In Illinois, residents age 55 to 85 were invited to meet
Mike Ditka, and learn why Wall Street wants to buy your
annuity. Is there such a thing as free insurance? Are you in
danger of outliving your life insurance? Ads like this prove
that life settlements involve more than just the rich and the
extremely wealthy.
Our Department supervises any individual or entity involved
with the business of insurance. Late in 2007, we subpoenaed
records from Coventry First, so we could understand how the
industry operates within our borders.
Coventry filed suit to quash the subpoena arguing that it,
Coventry, is beyond our regulatory reach. We prevailed at the
trial court, and the suit is now on appeal.
In Illinois, for 17 months, we have labored through
legislative negotiations with the insurance and life settlement
industries. Our legislators have been Herculean in bringing
Illinois to the brink of regulation that includes a hybrid of
the best practices from the NAIC model law, and other States.
But we know Illinois law can not be molded to endorse,
implicitly, the life settlement business model, because too
much remains a mystery. Clearly, stranger-owned life insurance,
or STOLI, violates a fundamental policy, premised on the tenant
that a stranger should not want you to die. Our lives,
regardless of age, should not be commoditized, packaged, and
traded on Wall Street, like credit default swaps.
All responsible parties agree, STOLI should be banned. But
as States, and as a nation, we lack answers to important
questions, including who are the sources of capital for life
settlements? What are the payment arrangements between the
commercial parties? What are the roles and compensation for
brokers, solicitors, promoters? Who are the life settlement
consumers, and most importantly, what has been--or is--the
impact of a life settlement on those individuals or their
families?
We regulate to protect consumers. That regulation must
include measures to reduce the opaque hieroglyphics of the life
settlement industry. With annual reporting, complete
disclosure, and stringent oversight, we will protect our aging
population. Life settlement deal-makers, including solicitors
and promoters, must be licensed and subject to examination,
penalties and revocation.
Our economic crisis has been attributed to the failure of
institutions and Federal regulators to understand assets and
liabilities on which enormous institutional bets were placed.
As this crisis proves, regulation must enhance transparency of
otherwise mysterious financial products.
As legislators and regulators, on behalf of our parents,
our aging neighbors, friends, and constituents, we need
unmitigated transparency in the business of life settlements.
For these reasons, while actively engaged on a State level, Mr.
Chairman, we pledge to support this special committee, and
offer our support for your continued efforts.
Thank you for your attention. I look forward to your
questions.
[The prepared statement of Mr. McRaith follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The Chairman. Thank you, Mr. McRaith.
Mr. Joseph.
STATEMENT OF FRED JOSEPH, COMMISSIONER, DIVISION OF SECURITIES,
COLORADO DEPARTMENT OF REGULATORY AGENCIES, ON BEHALF OF NORTH
AMERICAN SECURITIES ADMINISTRATORS ASSOCIATION, DENVER, CO
Mr. Joseph. Thank you, Chairman Kohl, Ranking Member
Martinez, and committee staff. I'm honored to be here today to
discuss the impact life settlements have on our citizens, and
the need for strong regulation of these financial products by
the appropriate regulatory authorities.
Over the years, the North American Securities Administrator
Association, or NASAA, and its members have been extremely
active in dealing with the problems associated with viatical
and life settlement investments, terms that have become
interchangeable.
At the outset of my testimony, I'd like to offer 3 general
principles that I believe should guide legislators and
regulators as they address the continuing challenges arising
from these products.
First, life settlements are complex financial arrangements
involving both securities and insurance transactions.
Consequently, regulating them effectively requires a joint
effort by securities and insurance regulators, each applying
their laws and expertise to different aspects of the product.
Second, although life settlements may serve a useful
purpose by enhancing the value and liquidity of life insurance
policies, they also pose significant risk to policy holders and
investors. For example, thousands of investors--many of them
senior citizens--have been victimized through fraud and abuse
in the sale of viatical and life settlements. Notwithstanding
substantial successes by State securities regulators with their
enforcement actions, and higher standards among industry
participants; abuses continue. Diligent oversight of these
products remains necessary.
Finally, life settlements are constantly evolving in terms
of product design, the policy holders involved, and the types
of investors to whom they are marketed. Accordingly, lawmakers
and regulators must carefully monitor these developments and
respond to new challenges by creatively applying their existing
laws and, where necessary, adopting new laws and regulations.
This is one reason why I applaud the committee for convening
this hearing today, and focusing attention on this important
issue.
Traditionally, viatical settlements have involved two
distinct transactions. In one, the viatical settlement provider
pays the insured some portion of his or her death benefit, in
exchange for an assignment of the sale of the insurance policy
to the provider. This is an insurance transaction, properly
regulated under State insurance law.
In the other, the provider arranges for interest in the
settled policies to be sold to investors, with the promise of
returns to be paid upon the death of the insured. This is a
securities transaction, properly regulated by our State and
Federal securities laws. The offer and sale of investments in
viatical settlements has been marked by a wide range of
fraudulent practices, and these abuses have been documented in
scores of enforcement actions by securities regulators over the
years, as well as scholarly articles profiling the industry.
In addition, in classic Ponzi schemes, promoters have used
fraudulent life expectancy evaluations that are prepared by
captive physicians, inadequate premium reserves, and false
promises of large profits with minimal risk.
In short, while viatical transactions have helped some
people obtain funds needed for medical expenses and other
things, those benefits have come at a high price for investors,
many of them senior citizens. To address these problems, State
regulators and the SEC have fought strenuously to regulate
viatical settlements under securities laws. Those laws require
sales agents to be screened, licensed, and tested. Promoters
must register their offerings with securities regulators, and
make detailed disclosures to investors. The securities law
impose strong financial anti-fraud standards, and they provide
remedies to deter violations.
Using these laws, securities regulators have significantly
reduced the incidence of fraud in the securities market. But
our members continue to see evidence of bad actors that once
characterized the entire industry.
For example, in May 2007, my office in Colorado filed an
enforcement action against a company called Life Partners, and
its affiliates and agents. We alleged that for 3 years, the
defendants sold unregistered viatical settlement investments to
over 100 Colorado investors, netting over $11 million. We also
alleged that Life Partners' sales agents were unlicensed, they
marketed the investments using fraudulent misrepresentations.
In December of last year, the District Court held that the
offerings were unregistered securities, marketed through
unlicensed agents. Life Partners subsequently stipulated to a
permanent injunction, and agreed to make rescission offers to
all Colorado investors.
The viatical settlement industry has changed significantly
since its early days, and it continues to evolve in terms of
viators, investors and industry participants. For example, the
role of institutional investors have become increasingly
prominent in the life settlement market. Along with this
development is a desire among some life settlement companies to
raise standards of conduct, promote sound regulation, and
establish a legitimate industry sector, untainted by past
abuses.
In conclusion, lawmakers and regulators must follow all of
these trends and must be prepared to acknowledge improvements
in the industry, but also to address any new threats to viators
and investors that may arise.
I look forward to the findings of the committee in this
important area of financial services regulation, and I thank
you, again, for the opportunity to share my views.
[The prepared statement of Mr. Joseph follows:]
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The Chairman. Thank you, Mr. Joseph.
I believe that each of you, in your own good way, has
demonstrated and testified today that the life settlement
industry is a legitimate industry, albeit a new one. That it
has a real place in the market under certain circumstances, but
that because it is new, and growing as quickly as it is, it is
not sufficiently regulated in order to see to it that we
protect consumers to the extent that they fully deserve. Thats,
what we need to do is take a careful look at this industry, and
provide the kind of oversight and regulations that will ensure
that those people who participate in life settlement situations
are fully protected. Is that a fair statement?
[Panelists nod in agreement.]
The Chairman. Anybody disagree with that in any way?
Mr. Joseph. Senator.
The Chairman. Mr. Joseph.
Mr. Joseph. There have been problems in the past, from the
securities side of the transaction. At least from the outset
there were companies involved some are no longer with us,
obviously, that conducted their business in a fraudulent
manner; the policies didn't exist, or the returns that they
touted were outlandish, and that sort of thing, from the
securities side of the transaction. So, I will say that from
the outset.
The Chairman. There's room for outright fraud and
dishonesty?
Mr. Joseph. Absolutely. Absolutely. In some cases, prison
sentences were imposed on the perpetrators.
The Chairman. Senator Martinez.
Senator Martinez. Well, thank you, Mr. Chairman, and I want
to thank all of the witnesses for very thoughtful statements
and very enlightening information that you've shared with us.
Let me see if I may have a couple of questions for Mr.
Leimberg. I wanted to ask, where do you believe is the greatest
opportunity for consumers to be harmed in these kinds of
settlement transactions?
Mr. Leimberg. I think the single-biggest harm is the taking
away of a life insurance policy that is really needed. If there
is no holdfold analysis, if there is no analysis of ``what do
you need?'' before you take it away, if you merely give them a
set of cookbook statements of, ``Here are the possible things
that can go wrong,'' and fold up your tent--if there is no
analysis, people will lose life insurance they really need to
keep.
Senator Martinez. How would you propose that that hold or
fold analysis take place? Would Ms. Senkewicz, in your office,
would they--would you do that kind of an analysis? Or would
there have to be a certification that that has been explained
to the customer, and that you've got like a form that you've
filled out, with certain questions asked and answered?
Mr. Leimberg. A needs analysis is the first thing a good
life insurance agent will do.
Senator Martinez. Yeah, but how can you impose that on the
industry, is what I'm saying. I mean, is there a set of
regulations you propose, or--?
Mr. Leimberg. Well, certainly you can demand that--
Senator Martinez. I mean, that could be a good business
practice--
Mr. Leimberg [continuing]. State law could require that
practice be done, and that they--the documents be kept in the
hands of the client, and perhaps in the hands of the broker, as
well, and perhaps even the settlement company itself might
demand a copy, just to satisfy itself that a needs analysis has
been done.
Senator Martinez. Ms. Senkewicz, any comment on that issue?
Ms. Senkewicz. Thank you, Senator.
Yes, it would have to be spelled out in Florida statute,
because this industry has made it abundantly clear to our
office that unless it is spelled out specifically in statute,
we enforce the statutes of the State of Florida, we don't make
them--it would have to be spelled out, because it's abundantly
clear that if we tried to do it without it being spelled out in
statute, they'd haul us right into court.
Senator Martinez. Do you believe that there is enough--
obviously, the State of Florida has some laws in place, I heard
from Mr. Leimberg that there--42 percent of these transactions
take place in States with no regulation, whatsoever. We do, in
Florida, have a set of statutes that regulate the industry,
correct?
Ms. Senkewicz. We do have a set of statutes.
Senator Martinez. I'd like to ask all of the panel members,
though, do you believe that there is a need for a set of
minimal guidelines, regulations, that come at the Federal
level, for the industry? I realize that longstanding tradition
of insurance being a State issue, and how jealously Insurance
Commissioner's Offices guard that, and so forth, but is there--
in this instance--some sort of a minimal Federal requirement?
I'd like to get an answer from each of you on that.
Mr. Joseph, you go ahead and start--we'll take it from the
right to the left.
Mr. Joseph. Senator Martinez, thanks.
With regard to the securities side of the transaction,
obviously the SEC has a great interest in this area. I believe
the Chairman of the SEC responded to Senator Kohl in a letter.
Traditionally, we've approached these things using investment
contract law to define a viatical investment as a security.
However, four years ago, in Colorado, our law--our definition
of security actually was amended to include the term ``viatical
settlement investments.''
I believe, if you really want to help the securities side
of it, at the Federal level, the law should be amended in the
Securities Act of 1933, amend the definition to specifically
state that a viatical settlement investment is a security,
period. That way, it doesn't have to be argued under investment
contract law, and the vagueness therein.
Senator Martinez. Mr. McRaith.
Mr. McRaith. Sir, Senator, if I could go back to your
initial question very briefly--
Senator Martinez. Sure.
Mr. McRaith. I think the biggest potential harm is when a
policy is sold or disposed at lower value than what it should
be. Because all of those lawful life settlements that might
have legitimate benefits for our aging population, there is no
guarantee right now that that senior or that individual policy
holder is being compensated for that policy at a fair market
value.
That's where I think the largest harm is at that point, and
I'm not going to quibble with Mr. Leimberg, he's clearly an
expert, who I have great respect for.
In terms of whether there should be a--
Senator Martinez. Well, let me go back on that. When you
talk about that issue, how does one--in other words, there--
I've been told, I understand that typically these settlements
would be for a larger amount than what the person could turn
the policy back into the company for.
Mr. McRaith. That's right. The problem is, we don't know
the food chain, so to speak. We don't know who's being
compensated, and at what rate, in the evolution of that from
the gentleman who lives on Maple Street in Tallahassee, FL, as
that policy works its way into a bundle of policies that's
being disposed of Wall Street.
We don't know--there's something in it for everybody along
that food chain, so to speak, Senator, and what we don't know
is whether Mr. Jones on Maple Street is getting the best return
on that policy that he should, or is the compensation to him
being reduced up front, so that the returns to the people--the
other participants in that deal--receive enhanced compensation.
There's absolutely no clarity of that--on these
transactions--there's no transparency about how these
transactions actually work, mechanically, and who's getting
paid what. There's no assurance that Mr. Jones on Maple Street
is getting the best deal he should--maybe for a policy he's
paid for, through premiums, for decades, in some cases.
So, to address your second question about whether there
should be a Federal minimum standard, I think the first
challenge as both of you well know, is helping people
understand what we're talking about. I've worked with our
legislature in Springfield, as I alluded to, for 17 months--
these are complicated transactions. Insurance, generally
speaking, is not something people talk about at cocktail
parties.
But then, when we start talking about life settlements, and
what that means, eyes will frequently glaze over, and people
have, generally, trouble understanding. So, the work of this
committee, in raising attention, raising the profile of the
importance of this topic, is something that I think is a real
important national Federal first step to deal with these issues
at a State level.
Senator Martinez. I'll go back to you, Mr. Chair.
The Chairman. I think so, and that's precisely why, as
you're suggesting, that we have this hearing today, and we
begin to highlight the industry and the potential pitfalls.
But I think we're all agreeing that it's one thing to
highlight the industry, and the kinds of things that can happen
to adversely affect people which, while absolutely necessary.
From there, to go to proper regulation, is a whole other step,
which has to be taken.
Isn't that right, Mr. McRaith?
Mr. McRaith. I would agree with that, yes. Absolutely, Mr.
Chairman.
The Chairman. Do all of you feel that we're a long way from
there? A long, long way?
Mr. Leimberg. Absolutely. Absolutely. I think that bad
actors will find cracks in State laws, and they will exploit
them to their fullest extent.
What we've got right now is a patchwork of State laws, and
I don't see anything but a patchwork of State laws. So, without
some kind of Federal oversight, we're going to continue that
patchwork, and the bad actors will drive a truck right through
it.
The Chairman. Well, let's ask the other panelists about
that. You're suggesting that the State laws we have, the
patchwork of State laws we've had are not adequate, that we
need Federal regulation to begin with, to be followed by
adequate State regulation. Is that right?
Ms. Senkewicz. Mr. Chairman, if I might address that
question. I believe the Senator's question may have also been
instigated by something in my testimony where it did--at least
on the STOLI level--allude to, perhaps, banning it at the
Federal level.
But, I must admit, that statement is borne somewhat of
frustration in the difficulty we've had in Florida in passing
what we consider, at the Office of Insurance Regulation,
inadequate viatical, or life settlement law. The fact is, as I
stated in my written testimony, the office introduced a bill to
enhance both the reporting, the disclosures, strictly on the
viatical, or life settlement side, plus the measures to address
STOLI, and the industry came back with, did not support us in
that effort, hired lobbyists, and came back, in fact, with an
alternative draft that was put forth as being an adequate STOLI
bill, but in fact, if you read it very carefully, gutted what
we were even doing--that little that we were able to do.
So I would suggest that there has been some difficulty at
the State level. So, if the States were aware, and industry
aware that Congress--yes, you really are interested in this,
and that perhaps a few years down the road, if the States have
not been able to adopt the NAIC model, for example, across the
board, to adequately protect consumers from some of these
issues, then I think that that would be fair warning.
The Chairman. Mr. McRaith.
Mr. McRaith. Yes, Mr. Chairman.
Just to follow up--there will always be bad actors who will
always evade any regulation that's in place--we know that. I
think the first key to any successful regulation is reporting
and accountability so we can track how the industry evolves.
As you well know, this industry has evolved from a $2
billion industry at the beginning of this decade to over--some
estimates are over $30 billion right now--it's evolving,
quickly. The important thing is, do we have the information so
we can make informed public policy decisions, going forward.
The Chairman. Yes, Mr. Joseph?
Mr. Joseph. Senator Kohl, if I could just speak briefly, in
Colorado--just in Colorado only, when we passed our law, four
years ago, it was a dual act, it addressed insurance,
primarily, and then at the very end it spoke to the securities
part, where it changed the definition of security in our law.
Actually, I believe--and I'd like to offer this to your
committee staff to look at it--I believe it's a good roadmap as
to, perhaps, what approach should be taken. I'm not willing to,
totally say that, at the State level, that we can't handle it,
because I believe--at least in our State--we're dealing with it
based on the law that we have in place. So, I'm pleased with
the way it works.
The Chairman. Any other comments from the first panel?
Questions?
Senator Martinez. None from me, sir, but I want to thank
the panel for insightful information.
Mr. McRaith. Thank you.
The Chairman. You've provided some really important
information to us today, and enlightenment, and so we thank you
for being here.
Mr. McRaith. Thank you very much.
The Chairman. Thank you so much.
The first witness on this second panel will be James Avery.
Mr. Avery is President of Individual Life Insurance at
Prudential. In 2007, Mr. Avery became chairman of the Life
Insurance Committee of the American Council of Life Insurance,
known as ACLI.
He's also a member of the ACLI CEO Taskforce on Secondary
Markets. Mr. Avery is a Fellow of the Society of Actuaries, and
a member of the American Academy of Actuaries.
Our next witness will be Scott Peden, General Counsel and
Secretary of Life Partners Holdings and the President and Chief
Operating Officer of its primary operating subsidiary, Life
Partners, Inc.
Mr. Peden has worked on legislation and regulation for the
protection of all parties in the transaction of life
settlements, and he's testified before the National Council of
Insurance Legislators, and State insurance committees and
regulators.
Finally, we'll be hearing from Michael Freedman, Senior
Vice President of Government Affairs for Coventry First, the
country's leading purchaser of life settlements.
Prior to joining Coventry, Mr. Freedman served as Vice
President of Public Affairs and Public Policy for Global
Crossing, Limited. He also previously served as Associate
Attorney in New York and received his law degree from the
University of Buffalo.
We thank you all for being here. Mr. Avery, we'll take your
testimony.
STATEMENT OF JAMES AVERY, JR., PRESIDENT, INDIVIDUAL LIFE FOR
PRUDENTIAL FINANCIAL, ON BEHALF OF AMERICAN COUNCIL OF LIFE
INSURERS, NEWARK, NJ
Mr. Avery. Good afternoon, Chairman Kohl, and Ranking
Member Martinez and committee staff. I thank you for inviting
me here to discuss the exposure of senior citizens to abusive
life settlement practices.
As you know, for centuries, life insurance has served as a
valuable economic instrument, protecting families and
businesses from the potentially devastating financial impact of
an untimely death.
Now, my comments here today are going to be limited to just
a sub-set of life settlements which are really predatory
schemes designed--in our opinion--to subvert the true purpose
of life insurance. The schemes are intended solely to enrich
both the intermediaries who initiate them, and investors, who
are looking for above-market returns.
Called stranger-owned life insurance--as already
referenced, or known as, STOLI--they are fraudulent and they
are contrary to both public policy and State law, which require
life insurance policy owners--or beneficiaries, for that
matter--to have an initial insurable interest in the continued
life of the insured.
Quite to the contrary, STOLI policy owners and
beneficiaries have an interest only in the death of the
insured. Quite frankly, the sooner the better.
Vulnerable seniors are lured into these schemes with offers
of free insurance for a couple of years, along with promises of
cash incentives, free meals, and even vacations. They may be
asked to sign applications that grossly misrepresent the
current condition of their health, or their income, and even
their net worth. The senior may also wind up signing documents,
which unknowingly make them responsible for extremely large
loans, with high interest rates, to fund the initial premiums
on the so-called ``free'' insurance.
The stranger, or speculator, initiating the transaction is
actually attempting to cherry-pick the individuals with the
shortest life expectancy, and thereby arbitrage the pricing
assumptions that the insurance providers is using.
Now, after a two-year contestability period, when the
insurer can no longer rescind the coverage due to fraud or
misrepresentation, the senior is usually faced with two
options. They can either repay the loan that was used to fund
the initial premiums--at a significant cost, usually hundreds
of thousands of dollars--or they can sign over the life
insurance policy as to the speculator, in full satisfaction of
the loan. As you might imagine, the senior really generally
only has the latter as their choice.
The policy is then packaged into a death bond and sold to
investors. As part of the scheme, the senior must agree to
periodic phone calls or visits, to monitor his or her own
continued existence. Sadly enough, if life expectancy is less
than a year, these grim reaper calls can occur as frequently as
monthly.
Now, many of your constituents, in society overall, are in
fact harmed by STOLI schemes. First, the victimized senior is
usually unintentionally participating in what is a fraud. The
senior may be responsible for undisclosed taxes, as was
mentioned, on the economic value of the free coverage, the
forgiveness of the loan, as well as any other incentives that
they've accepted as part of the arrangement.
There's actually no guarantee, in fact, that the speculator
will acquire the policy after two years. They can change their
mind. It may be that the senior's health has improved, or that
the speculator no longer has the funds to pay the future
premiums that will be required. They can walk away, and in some
cases, the senior may be responsible for the outstanding loan.
The senior may be ineligible for additional life insurance
coverage that they need for their own benefit--either for their
beneficiaries, or for their estate planning, or to support
other beneficiaries, because the investor is now holding all of
the coverage that they may be entitled to buy from the
insurance industry.
Yet, the financial markets are maybe once again exposed to
another sub-prime-like securitization scheme, which really only
benefits the intermediaries, as we've learned.
The life insurance industry strongly supports legislation
to stop STOLI, but it has faced stiff opposition, as you've
heard earlier, from settlement providers, premium finance
companies, and the investors.
The State legislators are continually told that life
insurance is not being sold for investors. However, I will tell
you--many investigations and court cases have provided evidence
to the contrary. In fact, I will share with you one of many
examples.
At my own company, Prudential, we uncovered a case last
August, after Ohio had passed a very effective law prohibiting
all STOLI. It involved a 74-year-old woman who was driven from
her home in Cleveland, OH, to Pittsburgh, PA, which has no such
law, for a medical exam, and to sign an insurance application.
When she was interviewed by our investigator, she was
shocked to learn that the death benefit on the policy that she
applied for was $9 million. She was shocked, because her and
her husband's monthly income was $950 from Social Security and
they had a total net worth of $2,000. Needless to say, once she
learned what had been undertaken, she was very concerned for
her own personal safety. This is one of many such examples.
Now, as you probably know, insurers design, and they price
their policies, using averages to assess the probability of
death, surrender, and lapsation of coverage, over the life of a
large book of business. While those who are fortunate enough to
live long lives may enjoy the peace of mind of knowing that
their family or business had been protected financially, they
are also the ones that fund the early death benefits to the
unfortunate ones who die an early death, that suffer an early
death. That's how all insurance works.
This is not the case with STOLI. The investors hope to
realize an above-average return by buying policies only on the
lives of those selected individuals who they expect--and hope--
will die early. History suggests that if they are successful at
these transactions, they will be undermining the ability of the
life insurance providers to offer legitimate and needed
coverage to responsible citizens.
In conclusion, the life insurance industry is working hard
to get legislation passed in each and every State, to prohibit
all forms of STOLI, and to ensure that life insurance continues
to be readily available, on an appropriate, and an affordable
basis.
I, again, thank the committee for this opportunity to
testify on behalf of the insurance industry, and we are hopeful
that this hearing, and the findings that you bring forth, will
encourage all State legislators to continue efforts to curb
this abusive practice, which is a threat to all of your
constituents, and especially the senior citizens.
Thank you.
[The prepared statement of Mr. Avery, Jr. follows:]
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The Chairman. Thank you, Mr. Avery.
Mr. Peden.
STATEMENT OF SCOTT PEDEN, PRESIDENT, LIFE PARTNERS,
INCORPORATED, WACO, TX
Mr. Peden. Mr. Chairman, Senator Martinez and members of
the committee, I'm honored to testify in front of you today as
an industry representative, on behalf of Life Partners, Inc.,
as this panel examines the life settlement industry. I
appreciate the work of this committee in protecting the
interests of our parents and our grandparents.
Life Partners is the oldest, and the only publicly traded
provider in the life settlement industry. The typical policy
that is presented to Life Partners is $1 million to $10 million
in face, and is owned either by a legal entity--such as an
insurance trust--or by financially sophisticated individual.
As is apparent, most senior Americans do not own the type
of large-face policies that I'm referring to. The policy owners
that Life Partners deals with are financially sophisticated
seniors.
The life settlement industry provides a private sector
solution to a public sector problem--that is, illiquidity among
senior Americans. Prior to the establishment of our industry,
policies which are now sold would simply have been abandoned,
and the inherent value in those policies given up as windfall
profits to life insurance companies.
Now, the liquidity needs of these seniors are being met,
privately, discretely, and in a manner that is beneficial to
both the purchaser and the seller. We ask nothing more than for
insurance companies to fulfill these contracts into which they
freely entered.
Unfortunately, the life insurance lobby has promoted State
legislation to deter these life settlements, and help them
retain their windfall profits. The insurance lobby is extremely
well-financed and influential, but it is not looking out for
the best interests of American seniors. That is unfair, and
extremely detrimental to policy owners.
Now, let me address some of the issues that the committee
is specifically investigating. No. 1, the issue of soliciting
seniors to purchase policies for a later sale.
We know that there is a concern for senior citizens who
might fall victim to arrangements in which they are paid to
purchase a policy with a contemporaneous arrangement to sell
it, at a future date. This, so called, investor-initiated life
insurance, or stranger-initiated life insurance, is a practice
which Life Partners has never engaged in. But it is important
to note that this is an agent supervision issue--not a live
settlement issue.
Insurance agents should assess the true needs of consumers,
and should answer all application questions truthfully. But, it
is up to the insurance companies to make sure that their agents
follows these rules. Then, if the insurance company chooses to
issue a policy, they do so with the full knowledge that the
United States constitution permits that policy owner to sell
the policy at some point in the future.
No. 2, the regulation of live settlement brokers, and their
commissions. A live settlement broker offers valuable advice
and services to their clients, and they deserve to be
compensated for it. However, unlike our company, they represent
the policy owner. Uniform, Federal regulation may be
appropriate in order to protect those who are financially
unsophisticated.
No. 3, State versus Federal laws a regulations. Article I,
section 8 of the United States Constitution authorizes Congress
to regulate commerce among the several State. Most life
settlement transactions are interstate in character, sometimes
involving a number of different States. The burden of complying
with a patchwork of conflicting State laws only raises costs,
and lowers the ultimate value paid to policy owners.
Of course, State legislators can certainly regulate
intrastate transactions, but the jurisdiction of State
legislatures must end at their borders, and States' efforts to
extend their jurisdiction beyond their borders, and venture
into congressional jurisdiction, must be clearly and completely
preempted.
No. 4, clarifying the tax liabilities arising out of a life
settlement transaction. We would urge the committee to consider
legislation which clearly defines any tax liability for policy
owners. We believe that the proceeds from a life settlement
should be treated as a capital gain or loss, based on the
difference between the total amount of premiums paid for the
policy and the amount of proceeds from the sale.
Our overall recommendations to Congress for dealing with
the life settlement industry are as follows: First of all,
recognize that the secondary market for life insurance is not
the business of insurance, and should be regulated differently
than our insurance companies.
No. 2, passing legislation which expressly federally
preempts the entire field, establishing a uniform set of life
settlement regulations at the Federal level, at least for
interstate transactions. This will promote interstate commerce,
reduce uncertainty, and provide value to seniors who want to
sell their policies.
Also, it should recognize that many of the reported abuses
or problems with the issuance of policies to unqualified
insureds, rests with practices of insurance agents, and
insurance companies--not with life settlement companies.
Recognizing that strict regulation may not be appropriate
or necessary for accredited or sophisticated insurance
consumers, and establishing an appropriate regulatory construct
that recognizes a distinction between ordinary insurance
consumers, and those who are financially sophisticated.
Mr. Chairman, Senator Martinez, it has been a privilege to
offer our company's perspective on the life settlement
industry. Life Partners has a firm commitment to protecting
unsophisticated policy owners, and preserving the property
rights of all senior Americans. We appreciate your
consideration, and look forward to your questions.
[The prepared statement of Mr. Peden follows:]
[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
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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:
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\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).
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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\
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\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]