Insurance regulators state legislators plan to tackle the thorny issue of insurable interest with regard to annuity sales, preparing the groundwork for changes that could discourage stranger-originated-annuity transactions.
In a public hearing likely to be held in May in New York, the National Association of Insurance Commissioners will discuss the legitimacy of third-party-annuity sales, in which an investor buys an annuity with death benefits on an unrelated person.
The National Conference of Insurance Legislators, which represents state elected officials in Washington, may draft a model act for stranger-originated-annuity sales similar to the one it drafted for stranger-originated life insurance.
News reports about stranger- originated-annuity transactions
(InvestmentNews, Feb. 22) involving terminally ill annuitants, and regulators' concerns about such deals, have piqued the interest of the NAIC's life and annuities committee, said Thomas R. Sullivan, the insurance commissioner of Connecticut, who is chairman of the committee.
He declined to say whether any state insurance regulators, who constitute the membership of the NAIC, are conducting investigations.
NCOIL member Brian Kennedy of Rhode Island, however, said that his state's regulators are looking into a case involving stranger-originated annuities that was the subject of a story in The Wall Street Journal.
“When you undermine the principle of insurable interest, that's something we're concerned about,” Mr. Sullivan said. “What the hearing will probe is the broad principle: Are the transactions lawful? Do they undermine insurable interest? Is there enough from a consumer protection perspective on the books today in model laws and regulations? If there isn't, how should we tighten them?”
At the hearing, the group intends to assemble annuity providers, those in the life settlement business, annuity investors and individuals whose lives have been insured in these transactions, Mr. Sullivan said.
The applicability of state insurable interest law to annuity sales is central to this issue and has been raised in several federal civil suits filed by Transamerica Life Insurance Co. and Western Reserve Life Assurance Company of Ohio. The insurers are suing an attorney, a group of broker-dealers and their representatives for arranging stranger-originated-annuity transactions.
Laws on insurable interest with regard to life insurance are typically stringent. A model law drafted by the National Conference of Insurance Legislators prohibits the settlement of insurance policies for two years, which fits with the two-year contestability period life carriers have to investigate and rescind claims on suspicious policies.
A similar model law by the NAIC prohibits settlements for five years.
But states vary in the strictness with which they apply insurable interest to annuity sales.
“There are states with stronger laws and consumer protections than others,” Mr. Sullivan said. “We'll do an analysis across the board to see who's got the best laws and the most pragmatic approach for allowing transactions that are in the customer's best interest but are also lawful.”
Many insurers have already tightened their underwriting standards to forestall stranger-originated-annuity transactions, said Steven B. Davis, partner at Stradley Ronon Stevens & Young LLP and co-chairman of the law firm's insurance practice group.
Proponents of third-party-annuity sales assert that insurance companies — eager for commission revenue — looked the other way when these sales were taking place, and became critical of the practice only when they had to pay death benefits on the investor-owned policies.
“There is no law against [third-party-annuity sales],” said an executive at a firm that helped arrange such sales, who asked not to be identified. “It's the insurance companies who've been playing the game and fabricating stories to protect profitability, regardless of insurable interest and contract laws.”
Mr. Sullivan, who served as an executive at The Hartford Financial Services Group Inc. for many years, said that though insurance companies could indeed structure stricter contracts to prevent investor-owned-annuity cases, it is up to regulators to intercede.
“It's a leap to suggest that there's no room for the regulators in terms of writing more stringent laws and regulations to protect customers,” he said. “Unless we codify that we need a law or statute, you have an opportunity to be exploited, and we're not doing our jobs unless we write laws to mitigate that risk.”
E-mail Darla Mercado at [email protected].
