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CALIFORNIA LEGISLATIVE SPOTLIGHT ON LIFE SETTLEMENTS
February 20, 2008

On February 20, 2008, the Senate Banking, Finance and Insurance Committee significantly raised the visibility of life settlements by conducting an informational hearing entitled "The Growing Life Settlement Industry: Is Anyone Watching out for Consumers?"  The informational hearing received media attention including a front page article in the Los Angeles Times and electronic media in the Sacramento and San Diego television markets.  This heightened visibility leaves little doubt that some form of legislative activity to restrict or regulate life settlements in California is on the horizon.

The legislative informational hearing was divided into four panels of witnesses consisting of the life settlement industry, the life insurance industry, alleged "victims" of life settlements, and the Department of Insurance.  The witness panels provided factual testimony about their perspectives on life settlements and there were no "knockout punches" or surprises.  The committee focused on the issue of "STOLI" as an abuse of life insurance that threatens premium pricing and the traditional uses of life insurance.  The life settlement panel countered by stating that both life insurance underwriting practices and current statutory restrictions on "insurable interest" are tools to limit life insurance policies that are truly "stranger originated" at their inception.  Notwithstanding attempts by NCOIL to define a "stranger originated" transaction, the life settlement panel emphasized that the "devil is in the details" in attempting to subjectively define an insured’s intent at policy inception.  CALSA participated in briefing sessions that shaped the testimony of the life settlement panel and interviews with the media.

After four hours of testimony and questions from committee members, Senator Machado, who chairs the committee, announced his intention to introduce legislation that would apply the NCOIL definition of a STOLI transaction and explore the need for both licensing and enhanced regulatory oversight of life settlement transactions.  The precise language of Senator Machado's proposal has not been introduced or shared with the life settlement industry. CALSA is coordinating its activities with various life settlement coalition members and participating in briefings to educate legislators and staff about the complexities of the industry.  It is our intent to preserve the legitimate practice of life settlements that are beneficial to California consumers and to protect their property rights in a life insurance policy.

Needless to say, 2008 will be a critical year for the California life settlement industry.  The life settlement industry needs to maintain its cohesiveness and enhance its political effectiveness in order to succeed.  CALSA will be calling on its members to encourage their participation in its political outreach.  Thank you for your interest in CALSA and your continued support in this collective endeavor of great importance.

CALSA Legislative Update
October 1, 2007

The 2007 legislative session was less active in its challenges to current life settlement practices than last year's session, during which Assembly Bill 243 posed a serious threat to the industry. This environment afforded CALSA time to strengthen its presence in Sacramento, and to prepare for the 2008 legislative session which is expected to include some degree of focus on the life settlement industry.

There were many factors in 2007 that diverted the attention of the legislative process away from life settlement issues.  First, there were significant changes to the legislature, with 36 new Assembly Members and 10 new Senators. Second, the chairs of the Assembly Insurance Committee and the Senate Banking, Finance and Insurance Committee were also new to their leadership positions and were unwilling to consider legislation on a complex and little understood topic that lacked media attention.  Third, the entire political structure was preoccupied with the effort to enact comprehensive health insurance reform in California.

The relief from an immediate legislative threat in the 2007 session provided CALSA with an opportunity to prepare for future legislative activities. Unlike the 2005-06 legislative battle where segments of the life settlement industry were fighting among themselves, there is now a true coalition of life settlement providers. This unification of interests will be extremely important in advancing life settlement industry positions in the future as the legislature will no longer be confronted with an array of divided interests. Additionally, CALSA and its coalition partners have been educating key legislators and staff about the complexities and intricacies of the life settlement industry in this less volatile environment.

These alliance building and educational activities are expected to pay dividends when the California Legislature considers the NAIC Model Act or other life settlement related legislation. Given the activity going on in other states, California seems a likely new battleground. Recently, the NAIC has been frustrated that its Model Act adoption process has been operating in a vacuum because many state insurance commissioners have not followed through with legislation introduced in their home state.  In response to this situation, the NAIC adopted a new rule that required any future Model Act be adopted by a two thirds vote of the NAIC membership. Additionally, each commissioner voting in favor of the Model Act must commit to introducing legislation in that commissioner’s home state so that the Model Act becomes state law.  In another national forum, CALSA is monitoring the deliberations of the NCOIL process that has a friendlier attitude toward life settlements with more modest and common sense reforms.

Despite the efforts of CALSA and the national life settlement association, LISA, California's newly elected Insurance Commissioner Steve Poizner voted in favor of the Model Act with the caveat that the California Department of Insurance (DOI) lacks the resources necessary to pursue the legislative introduction of the proposal.Although the inability of the DOI to introduce legislation could be considered a partial victory, CALSA, along with its coalition members, would have preferred the Commissioner vote against or abstain from voting on the NAIC Life Settlement Model Act. Therefore, given the numerous issues raised by the Model Act, CALSA and its members must anticipate and prepare for a battle during the 2008 California legislative session.

CALSA will continue and intensify its coalition building and educational efforts during the rest of this year.  Most importantly, we will continue to educate the respective chairs and members of the Senate and Assembly policy committees who have jurisdiction and considerable influence over any attempt to revise the current life settlement environment.  Now that the 2007 legislative session has adjourned, CALSA is developing a grassroots contact strategy with key legislators that will include CALSA member contacts in legislative district offices.  We all need to be involved in this process if we are to successfully protect ourselves against potential legislative threats as well as capitalize on future opportunities to advance industry interests.

Life Settlement Transactions

The California Life Settlement Association (“CALSA”) was founded in 2005 to advance the interests of the life settlement industry in California.  This industry is in a fast growth mode fueled by a combination of seniors who wish to maximize the value of their life insurance policy assets and a rapidly growing secondary market for the purchase of life insurance policies by investment vehicles seeking attractive returns.

Background

During the 1980s the so-called viatical settlement market developed in response to the AIDS crisis.  These transactions involved the sale of life insurance policies by persons with a “catastrophic or life-threatening illness or condition” for an amount less than the death benefit, but more than the cash surrender value, in order to raise immediate funds to pay for end-of-life care.  Most importantly, viatical settlements reflected a growing recognition that an insured’s life insurance policy constituted an asset with potential benefits beyond mere cash surrender value.  Not surprisingly, the desperate circumstances of the sellers raised the specter of potential abuse, and viatical sales quickly became regulated in various respects by a series of provisions beginning with Section 10115.1 of the Insurance Code.

Ultimately, viatical settlements were replaced by “senior life settlements” as healthy policy holders began to capitalize on policy value during their lives and the financial markets recognized that the purchase of life insurance policies represented an untapped market.  In this case a senior would sell his or her no-longer needed life-insurance policy for an amount in excess of its cash surrender value instead of simply letting it lapse or receiving only the cash surrender value.  No evidence of consumer abuse has been ascertained beyond some questionable practices by ultimate purchasers of pools of policies when securitizing the pools. 

Evolution of the Marketplace
           
The concept of a life insurance policy as a saleable asset rapidly spread beyond those who already had policies and reached the point where the policies were either no longer cost beneficial to maintain or inconsistent with their insurance needs.  Intelligent seniors began to consider capitalizing on the asset value of their policies and the potential for new policies.  Furthermore, a number of financial entities began to develop programs which allowed seniors to acquire policies for which the financial entities arranged premium financing and which were ultimately sold to the benefit of the insured, the arranger and other third parties.  This latter group of policies has been tagged by the life insurance industry as “STOLI” (stranger owned life insurance) policies in an effort to discredit and demean the intelligent utilization by senior citizens of one of their assets. 

Attack on Life Settlements by the Life Insurance Industry

While the growth of the life settlement industry has brought obvious benefits to California’s senior residents by allowing them to capitalize on a heretofore little used asset represented by the  market asset value over  surrender value of their life insurance policies, insurance companies pricing models assumed a larger percentage of policy cancellations, with their inevitable savings in payouts, than is likely to occur where policies have been sold to investors who are in for the longer term.  This potential reduction in profits has resulted in a broad based insurance industry attack on senior life settlements in various states and enlisting various insurance organizations to promote pseudo reforms to life settlements.

The insurers’ efforts have included, but are not limited to the following solutions that in the first three instances are both contrary to long established insurance principles and adverse to the interest of the insured:

(1) Legislative proposals grounded principally on anti-STOLI rhetoric to require policies to be held for 5 years before sale, clearly an anti-consumer effort totally contrary the historical recognition in California that these policies constitute freely alienable property interests;

(2) Arguments aimed against STOLI activity as inimical to the purpose of life insurance and seeking regulatory support for the very questionable concept that no insurable interest exists when a policy on oneself is acquired with a view to the policy’s ultimate sale;

(3) Creating discriminatory underwriting standards designed to exclude any senior policies where sale might be a potential, thereby attempting to limit the senior market to the least sophisticated members of the population and often resulting in the rejection of an application solely on the basis that a portion of the premium may be borrowed;

(4) Revising pricing models to deal with the reality that more intelligent use of life insurance will mean fewer policies will be surrendered prematurely, clearly a legal and intelligent approach; and

(5) Hedging their bets by creating life settlement affiliates of their own.

Given that the life settlement market will likely continue to grow and insurance companies will only limit and re-price the senior market as to future-issued policies, it is likely that legislative efforts by insurers to eliminate or substantially curtail senior settlements will continue. The purpose of this discussion is to provide a proper overview against which to analyze those efforts. 

CALSA Position

CALSA wishes to make it clear that its members are not opposed to appropriate legislation aimed at real and documented abuses.  Certainly, we do not object to legislation directed at any abusive securities activities not already covered by law. Nor would CALSA oppose legislation dealing with discrimination against seniors in policy underwriting practices.  Furthermore, CALSA believes that life settlement industry "best practices" includes appropriate disclosures to insured’s so  that they are adequately informed about their life settlement transactions, including its legal and tax implications.

Should such above-described legislation or any further legislation affecting California’s life settlement market participants be introduced, CALSA plans to be an active participant and looks forward to discussing the relevant issues with all interested parties.