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Life Insurance Groups at Odds Over Securitization of Life Settlements

Source: Insurance and Financial Advisor

Posted on 11 Feb 2010

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The notion that securitization of life settlements should be regulated has sparked sharp disagreement between a life insurer's group and a life settlement trade group.

The American Council of Life Insurers (ACLI), which represents about 300 life insurers, is recommending the securitization of life settlements “be prohibited by legislation or regulation.”

But Russel Dorsett, president of the Life Insurance Settlement Association (LISA), called the ACLI recommendation “an extraordinary pronouncement from an industry that has consistently asserted that there is a legitimate place for life settlements in the market and that life settlements are a valuable financial tool for seniors.”

He called the ACLI recommendation “an affront to the principal of free and open capital markets,” taking from consumers the “true market value” of their life insurance policy, in a statement.

He called the recommendation “sensationalistic nonsense, larded with half-truths leavened by out-right lies.”

Explaining its new policy, the ACLI said, “Securitization of life insurance settlements exposes senior citizens and investors to increased risk of fraud and the practice should be prohibited by legislation or regulation.”

Securitization of life settlements is being reviewed in Massachusetts, by Congress and by the U.S. Securities and Exchange Commission.

The ACLI noted, “securitization will lead some settlement promoters to target senior citizens and induce them to commit fraud in connection with illegal stranger-originated life insurance (STOLI) transactions.”

Life settlement companies must “build their inventories through STOLI,” the ACLI said in its statement. Securitization packages will “become contaminated” with STOLI and “securitization promoters have no incentive to properly underwrite the package,” according to the ACLI.

The ACLI “knowingly attempts to confuse not only the public but public policymakers by equating legitimate life settlements” with STOLI, “while characterizing the licensed and regulated intermediaries involved in the life settlement industry as ‘STOLI promoters’ preying upon seniors,” Dorsett said.

“The reality is that STOLI is a primary market problem, whereby a new insurance policy is applied for and issued in the absence of a valid insurable interest,” Dorsett said. “In that context, the real ‘STOLI promoters’ are unscrupulous life insurance agents appointed by the very companies that constitute the membership base of the ACLI, as well as the life insurance companies themselves when they fail in their most fundamental underwriting responsibility: to establish a clear and valid insurable interest at the inception of the policy. “

LISA has consistently supported legislation in the states that makes clear to all parties that improper origination will result in a permanently invalid policy and to ensure that insurers carry out their responsibilities at origination, not many years after issuing the policy, Dorsett said.

“From a secondary market perspective, stranger-originated life insurance simply does not make financial sense,” Dorsett added. “A newly issued life insurance policy which has been properly priced and underwritten has no value as a life settlement. Nor will it have any value in two years — or five years — unless the insured undergoes a substantial change in health. The notion that the securitization of life settlements would create a pool of capital dedicated to creating worthless life insurance contracts flies in the face of economic logic.”


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