States eye tighter controls on sale of viaticals

Reacting to a series of scams involving the sale of life insurance policies held by the terminally ill, state regulators are moving to tighten controls over so-called viatical settlement contracts.

Insurance commissioners will take the first step at a meeting in New Orleans this week, where they will discuss model laws to protect investors. One widely favored measure would classify viatical contracts as securities for regulatory purposes.

Bad publicity from fraud cases involving viaticals flattened sales in the $1 billion-a-year industry last year and pushed it to champion regulations to rehabilitate its image.

But the industry also fears that states may go too far; some regulators, for example, want to ban a hot new viatical product known as a life settlement, trading policies held by healthy people.

North Dakota securities commissioner Syver Vinge, who chairs the North American Securities Administrators Association’s Viatical Project Group, says hundreds of millions of dollars have been lost by investors in viatical scams over the last couple of years.

“We’re just beginning to see it now,” he says, ” because people didn’t expect to see their money for two years or more, so it gave the scammers the chance to get ahead of the curve quite a ways.”

Though a federal court ruled in 1995 that the Securities and Exchange Commission has no power to regulate viaticals, Mr. Vinge says most states believe they can do so.

In fact, North Dakota, South Dakota, Iowa and Maine passed legislation last year to regulate viatical settlement contracts as securities.

State regulators are most concerned about ensuring full disclosure to investors, who usually buy contracts through a broker.

“The problems that have occurred, even with some of the legitimate viatical providers, have related to overstating expected returns, understating the risk and failure to disclose a lack of liquidity,” Mr. Vinge says.

Not surprisingly, William Scott Page, president of Fort Lauderdale, Fla., viatical settlement firm Page & Associates Inc., argues that many viaticals, including the ones his own company sells, are not securities.

“The producer of the investment has no influence on the outcome” of the investment, he says. “What affects the outcome of this investment is someone’s death.”

The viatical industry developed over the last decade to assist AIDS sufferers who needed cash to deal with their terminal illness.

The patients sold their life insurance policies at less than face value. Those investing in pools of such policies typically made 10% to 14% tax free when the policies paid off.

Now that new treatments have extended the lives of patients with HIV, the industry has moved to cancer victims, and, more recently, to healthy retiring executives and others with large policies who no longer need life insurance.

Conning & Co., a Hartford, Conn., insurance research firm, estimates that such life settlement contracts accounted for as much as 40% of the face value of viatical policies sold last year.

Most of the deals were handled by Viaticus Inc., a Chicago affiliate of CNA Insurance Cos., which owns a $1 billion portfolio of life settlement contracts.

“Virtually every state in the nation is in some kind of flux in terms of their thinking on viatical policy matters,” says Douglas Head, president of the Washington-based Viatical Association of America and legislative director for the Medical Escrow Society in Tavares, Fla. Dating from 1989, his company, is the nation’s oldest viatical broker.

His association, he says, opposes legislation enacted last year by Iowa that declared the investments to be securities, because it fails to make clear who legally would be considered the issuer of the security.

dying men file no papers

“Obviously, [policy sellers] won’t do a filing with a securities lawyer for eight months if they’re terminally ill.”

Kansas regulators say they are considering a ban on the sale of life insurance policies by healthy people.

In Iowa, the insurance division will soon send a bill banning life settlements to the state Legislature. Of concern is the possibility of fraud by healthy young people who buy policies just to resell them quickly.