North Dakota blazes a regulatory trail

NEW YORK — North Dakota last week became the first state to adopt a more stringent statute regulating life settlements, with special emphasis on stranger-originated life insurance.
Other states may follow, making life settlements a less attractive option for adviser clients who want to sell or invest in life insurance policies, industry observers say. Life settlements are the sale of life insurance policies by policyholders to third-party investors.
The statute is based on a revised model law developed by the National Association of Insurance Commissioners in Kansas City, Mo. Included is a requirement that a life insurance policy can’t be sold to investors within five years of issuance.
Not surprisingly, investors in insurance policies lobbied to maintain a two-year lockup period before such policies could be sold into the secondary market.
A five-year waiting period makes investing in the policies less predictable and less attractive to hedge funds and institutions, said Bruce Ferguson, senior vice president of state relations for the American Council of Life Insurers in Washington, which favors more stringent regulation of life settlements.

“It prevents insurance from being abused by investors to make a quick buck,” he said.
The statute also mandates that the policy seller be “of sound mind” as determined by a physician and have a 60-day “rescission rights” period. It also requires full disclosure of bids and commissions, in response to alleged fraudulent concealment of such contract terms uncovered by former New York Attorney General Eliot L. Spitzer.
The North Dakota statute is based not on the NAIC model law but on the “Poolman model law,” said Doug Head, executive director of the Life Insurance Settlement Association in Orlando, Fla. Jim Poolman, North Dakota’s insurance commissioner, has been among the most outspoken national advocates of the five-year rule.
“Commissioner Poolman is extremely popular in his home state, and he pushed this legislation through. There were four life settlements in North Dakota last year, so the new law won’t have much of a downside for us,” Mr. Head said.
“This law is the vision of Mr. Poolman; it is not a vision shared by other regulators,” said Scott Cipinko, executive director of the Life Insurance Finance Association in Marietta, Ga.
Mr. Poolman is unfazed by the criticism. “If ‘popular’ means that people trust me to do the right thing for consumers, then I’ll take that as a compliment,” he said.
“Mr. Poolman’s popularity had nothing to do with getting this law passed,” said one of the bill’s sponsors, Rep. Jim Kasper. A Republican state legislator, he is president of Asset Management Group Inc., a Fargo, N.D., financial planning firm.
“The North Dakota law is a camel — a horse put together by committee. It’s unconstitutionally vague and may be struck down,” Mr. Cipinko said.
The life settlement industry spent about $100,000 to lobby to defeat the bill, and that is a lot of money for North Dakota, Mr. Poolman said. “They don’t want the law to spread and become a precedent for other states.”
Idaho, Louisiana, New York and Utah have issued opinion letters or bulletins addressing stranger-
originated life insurance but haven’t passed the updated NAIC model law, said Whit Cornman, a spokesman for the ACLI. About half the states have laws based on a previous version of an NAIC model law containing fewer consumer protections, the ACLI’s Mr. Ferguson noted.
Mr. Head said that other states will probably not follow North Dakota’s lead in adopting the updated version of the Poolman law, with the possible exception of Iowa, because that state “has a huge insurance industry,” and its insurance commissioner, Susan Voss, is usually allied with Mr. Poolman on regulatory issues.
“The Idaho, Louisiana and Utah opinion letters basically say that current law covers the issue,” said Mr. Head. “New York might adopt legislation in some form, but not the North Dakota version.”
Iowa is scheduled to hold a hearing on the model law May 10.
Nine states are considering similar laws, Mr. Kasper noted. But neither he nor Mr. Poolman were willing to identify those states, because they didn’t want to tip off the life settlement industry as to where they should concentrate their lobbying resources.
Among the reasons why life insurers don’t like life settlements is that they wreak havoc on policy-lapse assumptions. Insurers also fear that all life insurance policy death benefits may lose their tax advantage if Congress looks at the deductibility issue too closely, Mr. Head noted.