Friday, February 19, 2010

Annuity Guarantee Rider Match May Be Near Final Volley

An annuity issue that has been bounced back and forth among regulators pitting arguments of property rights against product availability received another volley to a committee that may finally bring the match to an end.

On February 18, the Product Standards Committee of the Interstate Insurance Product Regulation Commission, Washington, voted unanimously to advance a proposal that would allow riders that offered guarantees to be terminated if that rider is sold by the policyholder to an investor. A new disclosure provision is included as part of the proposal, an effort to inform potential buyers of the rider of the termination provision.

The IIPRC was formed to develop uniform product standards for life insurance products that could be implemented nationally. It was developed and is affiliated with the National Association of Insurance Commissioners, Kansas City, Mo.

The issue has been developing since last summer with life insurers maintaining that the guarantee riders were created strictly to provide guaranteed income to individual consumers. Institutional investors, the industry panel argued, would use the product in more sophisticated ways that the riders were not meant for. If that institutional use was to come to pass, availability of these riders would dry up and those that were still available would become very costly because the assumptions that are the underpinning of these products would be rendered incorrect.

The counter argument was that when an individual purchases a guarantee rider with a variable annuity, that individual should be able to use what they have purchased in a way that he or she sees fit. The argument that insurers did not think that consumers could use riders to their full capacity like institutional investors did, was not giving consumers enough credit, according to those opposing the product standards.

The issue over the proposed standards, guaranteed living benefits for individual deferred non-variable annuities, GLBs for individual deferred variable annuities and guaranteed minimum death benefits for individual deferred variable annuities, was developed by the Product Standards Committee, sent up to its IIPRC parent the Management Committee, sent back down over criticism that it was anti-consumer and a pressing public policy issue that needed further examination including actuarial input, and now will be sent back up again for a possible vote either next week or at the spring NAIC meeting on March 25.

Prior to the 10-0 vote, advocates for the right of an owner to use something purchased in a way the owner saw fit, made a final case before the committee. Brian Staples of RIGHT LLC, Versailles, Ky., representing the Life Insurance Settlement Association, Orlando, Fla., argued that disclosure as proposed by the life insurance industry panel, was not the answer in every situation. An option is still needed for a contract owner to divest the rider if it is not performing well or the owner needs to raise funds.

In a Feb. 5 letter, Staples also noted that STOLI cannot occur without the actions of a producer and that efforts to curb the practice needs to start with better producer training and oversight by insurers. He also noted suitability issues over how these annuities are being sold to seniors.

A February 17 memo from the Industry Advisory Committee to the IIPRC’s Product Standards Committee states that the disclosure statement it had previously offered needs to be “strengthened.” It offered the following:

“The purpose of the guaranteed living benefit provided under this annuity contract is to provide retirement security through a stream of monthly income payments to the owner. The guaranteed living benefit will terminate upon assignment or a change in ownership of the contract unless the new assignee or owner meets the qualifications specified in the Termination provision of the guaranteed living benefit.”

During the discussion, at the request of the product standards committee, the words “retirement security” were removed in order to emphasize regular cash streams.
The IAC memo also noted that there is now a secondary market for annuities, citing a February 16 Wall Street Journal article “Investors Recruit Terminally Ill to Outwit Insurers on Annuities.”

IAC representatives include Prudential, Newark, N.J.; the National Association of Insurance and Financial Advisors, Falls Church, Va.; AEGON, the Hague in the Netherlands; New York Life Ins. Co., New York; the American Council of Life Insurers, Washington; and America’s Health Insurance Plans, Washington.

Tomas Serbinowski, a Utah regulator and life actuary, argued that if stranger-originated life insurance (STOLI) is the main concern, then he was not sure that a termination provision for these riders was the most effective way to prevent such solicitation. “We as regulators don’t like STOLI,” he added. And yet, he added, current life insurance standards have no similar provisions to prohibit assignment.

Birny Birnbaum, executive director of the Center for Economic Justice, Austin, Texas, asked, “What are the public policy concerns that this action is supposed to address?” If it is to protect consumers, he said that he didn’t see how it would help to take away their rights to sell what they bought. Rather, he continued, the life insurance industry is “trying to do for annuities what it does for the life insurance industry—prevent competition.”

Consumers are locked in to the rider, Birnbaum continued. He compared the industry argument to I.B.M. arguing for the mainframe computer and against PCs because they could hack into mainframes when personal computers were first invented.

Wednesday, February 17, 2010

Reaction to Producer Disclosure Requirement Starts As New York Joins Other States

A new regulation in New York that will require producers to disclose commissions to consumers is receiving initial feedback from different segments of the life insurance industry.

The regulation, announced on Feb. 9, requires agents and brokers to disclose how much commission is being paid and by whom it is being paid, if New Yorkers contemplating an insurance policy requests the information.

“Our members remain concerned about the effect this regulation could have on the marketplace but the Superintendent has agreed to work on interpretive guidance and we look for to working with him on that process,” says Whit Cornman, a spokesperson for the American Council of Life Insurers, Washington.

Doug Head, executive director of the Life Insurance Settlement Association, Orlando, Fla., says that the requirements for life settlement providers and brokers are much stricter than for insurance producers.

For instance, according to Head, a separate disclosure document must be signed by the seller and provider at the time of application and again at closing but for life insurance producers oral disclosure is initially permitted and must then be disclosed in writing at the issuance of the contract. And, he continues, for life settlements, all compensated parties must make disclosures while for life insurance sales, only those who have direct contact with the buyer must make disclosures. For life settlement companies, Head continues, requirements are immediate but for life insurance sales, the effective date is Jan. 1, 2011.

Currently, all but eight states have some sort of compensation disclosure requirements, according to data compiled as of Aug. 8, 2009 by the National Association of Insurance Commissioners, Kansas City, Mo. The compiled data includes New York which was anticipating a regulation when the information was put together. The District of Columbia and the Virgin Islands also did not have requirements as of Aug. 8, 2009, the data indicated.

The eight states are: Alabama, Delaware, Michigan, Mississippi, Massachusetts, South Carolina, South Dakota and Wyoming.

The requirements among states vary but in general there is a requirement for life insurance producers to disclose fees other than those deducted from premium and in some cases commissions, the data compiled by the NAIC indicates. In California, the disclosure requirement is specific to premium financing, with agents and brokers required to disclose the amount received from the premium financier, the data states. And, in Hawaii, the law is specific to life settlement contracts, requiring disclosure of “anything of value given in relation to a life settlement contract.”

A number of states and jurisdictions have provisions based on the NAIC’s Viatical Settlement Model Act which requires viatical settlement producers and brokers must disclose the amount and method of calculation of the broker’s compensation and separate requirements for life insurance producers and brokers. Those states and jurisdictions according to the NAIC, are Iowa, Kansas, Maryland, Nebraska, North Carolina, North Dakota, Ohio, Pennsylvania, Puerto Rico, Tennessee and Utah.

Requirements for insurance producers vary among these states.

In Iowa and Kansas, insurance producers must respectively disclose that the producer is representing the insurer and, in Kansas, the compensation received if a fee other than commission is going to be received.

In Maryland, licensed advisors must disclose fees and services to be performed, according to the data. Nebraska requires that consultants can only charge fees only if there is a separate written agreement signed by the client while North Carolina requires that insurer-controlled brokers disclose the relationship between the insurer and the broker, the data culled from state laws suggests. North Dakota requires consultants to disclose fees and services, and, in Ohio, licensed agents must disclose fees that are separate from the premium and agreed to by the consumer as well as the fact that the fee is not refundable.

In Oklahoma, however, the insurance consultant must disclose fees and services rendered while the viatical settlement producer must disclose that the broker solely represents the viator.

Pennsylvania requires that producer fees be reasonable in relation to services provided and in Texas, agents must provide a description of the methods and factors utilized for calculating the compensation to be received from the insurer or other third party while viatical providers and brokers must disclose who receives the compensation, its amount and the terms of compensation. And, in Virginia, viatical settlement brokers and providers will disclose all interests in the contract while licensed consultants have to disclose fees and other forms of compensations and the service for which they are charged.

Thursday, February 11, 2010

Agreement Reached on Final Piece of LE Best Practices

By Jim Connolly
An actuarial table that will create a benchmark for life expectancy providers is now finalized and will be officially released on schedule at the end of March, according to Scott Gibson, chair of a subgroup working on the project.

The subgroup’s work is the final piece of a Best Practices effort initiated by the Life Insurance Settlement Association, Orlando, Fla., and spearheaded by Michael Fasano, CEO and president of Fasano Associates, Washington, an LE provider.

The group’s charge was to create a table that was a baseline for all LE providers who could then adjust it according to how they develop their own actual to expected life ratios. What is being developed is a table with a good slope which will provide a “measuring stick so that good comparative measures can be made,” according to Gibson who is a consulting actuary in Lewis & Ellis’s Dallas office.

The first step in the process will occur by February 19 when all LE providers submit data for the table, according to Gibson. That data may be new, refreshed or existing data, he adds. The data will then be compiled and a table developed, Gibson explains. Completion of that table is expected by the end of February, Gibson continues. Both the table and an accompanying report are expected to be released by the end of March, he adds. The table could be updated annually if needed, Gibson continues.

Fasano said that the completion of the table is “very good for LISA and for the industry.” The subgroup’s work was able to get everyone on the same page so that a table could be developed, he adds.

After the table becomes publicly available, no later than March 30, the Best Practices committee and the subgroup that developed the table will remain in case additional work is needed at a later point, Fasano says.

The timing is important, according to Fasano, who says that the combination of Best Practices including the finalized table will give investors and potential investors who are going to be at the Trade Mission renewed confidence in the life settlement industry. The Trade Mission is an educational effort designed to teach investors and potential investors about the life settlement industry. The three city Mission will run from February 23-26 in London, Luxembourg City and Zurich.

The Best Practices effort and the new table will allow investors to make informed decisions on both LEs and the pricing of policies that they purchase, Fasano says. “It will give them “meaningful and comparable information on the accuracy of LE providers,” he adds.

This article first appeared in Life Settlement Review.

Tuesday, February 9, 2010

New York To Require Producer Commission Disclosure

The New York insurance department will require agents and brokers to disclosure how much commission is being paid and by whom, if New Yorkers contemplating an insurance policy request the information, according to a statement released by the department.

The regulation will be published in the February 10, 2010 issue of the State Register, and its requirements will take effect as of January 1, 2011.

Insurance Superintendent James Wrynn said in a statement that the new regulation will provide transparency by initially providing information if requested and then following up with a more detailed statement if the consumer still wants more information. "Almost everyone buys insurance at some point, and in these difficult economic times, consumers should understand any incentives that may potentially affect the recommendations from their agents or brokers," he said in the statement.

The proposed regulation would require that when a consumer applies for an insurance policy, the agent or broker must explain to the consumer:

1. The agent or broker's role in the transaction;
2. Whether the agent or broker will receive compensation from the insurer based on the sale;
3. That the compensation insurers pay to agents or brokers may vary depending on the volume of business done with that insurer or its profitability; and
4. That the purchaser may obtain more information about the compensation the agent or broker expects to receive from the sale by requesting that information from the agent or broker.

If the consumer asks for more information from the agent or broker, he or she must be provided a more detailed written disclosure of the compensation expected to be received as well as a description of any alternatives presented by the agent or broker and the compensation associated with those alternatives.

Birny Birnbaum, executive director of the Center for Economic Justice, Austin, Texas, praised the Department of Insurance's perseverance in promulgating a rule in the face of stiff insurance industry opposition. He said, "We hope consumers will take advantage of the compensation disclosures to discourage agents and brokers from steering consumers into unfavorable products – steering based on the agent and broker compensation arrangement and not the best interests of the consumers. Disclosures only work if consumers get the information and act on it." Birnbaum added, "Promulgating a regulation is a start, but effective implementation and enforcement is essential. We will monitor the Department's efforts to protect consumers."

Sunday, February 7, 2010

What a Busy Week!

News was popping this week. Here’s a recap of some of the major items that broke.

President Obama’s proposed 2011 budget released on Feb. 1 was not kind to the insurance industry—both life insurers and life settlement companies. For life insurers, a proposal that would target corporate-owned life insurance was one of several that prompted the American Council of Life Insurers, Washington; the Association for Advanced Life Underwriting, Falls Church, Va.; GAMA International, Falls Church, Va.; the National Association of Insurance and Financial Advisors, Falls Church, Va.; and the National Association of Independent Life Brokerage Agencies, Fairfax, Va.

Among the provisions raising consternation are:

--a COLI provision which would treat any material change in a contract as a new contract and in the case of a master contract, the addition of covered lives would be treated as a new contract only for the new lives covered. The proposal would repeal the exception for the pro rata interest expense disallowance rule for contracts covering employees, officers or directors other than 20% owners of a business that is the owner or beneficiary of the contracts. The 10-year estimate on this proposal is $7.8 billion.

--and, a proposal that would cut into a dividends-received deduction which these trade groups say prevents double taxation of corporate earnings and affect variable life and variable annuity products. The reason, they say, is that the DRD is used in accounts that fund these products. The 10-year revenue estimate is $4.3 billion.
Many in the life settlement industry are concerned about a provision in the proposed budget that they feel could place a heavy burden on the life settlement industry and even more critically, raises the possibility of calling into question the non-taxability of certain transfers of life settlements.

The proposal requires settlements of $500,000 in face value be subject to a 1099 requirement rather than a previously discussed $1 million or more. And, there is the possibility that life settlement companies would have to comply before the IRS puts rules into place, according to an industry expert Roger Lorence, a partner with the New York law firm of Sadis Goldberg.

If the guidelines are issued by the IRS on December 1, 2010, which is optimistic, life settlement companies would have to be ready to comply by Jan. 1, 2011. The effective date should be for Jan. 1, 2012, Lorence says.

If life insurers and life settlement companies share common concern over points in the President’s budget, this past week proved that they differ over life settlement securitizations. The ACLI released a policy statement calling for the end to the way to pool life insurance policies and sell pieces to institutional investors. Life settlement companies and the Life Insurance Settlement Association, Orlando, Fla., and the Institutional Life Markets Association, Washington, responded saying that the policy statement was absurd and noting securitization is a commonly used investment structure for pooling and parsing assets, a structure that, in fact, has been used by life insurers.

It was also a busy week for regulators. The California insurance department’s Commissioner Steve Poizner questioned rate increases of Anthem Blue Cross/Blue Shield. He issued a statement asserting that "State law requires that insurers spend at least 70 cents of every dollar of premium on medical care. I have instructed my department to hire an outside actuary to examine their rates line by
line to ensure they are complying with this state law. If we find that their rates are excessive, I will use the full power of my office to bring these rates down.”

And in New York, Insurance Superintendent James Wrynn fined Aetna Health Inc., a health maintenance operation (HMO) $750,000 as part of a settlement for what it says are infractions relating to the administration of the Healthy NY program from April 2007 through January 2009.

Healthy NY is a state-subsidized program designed to assist small business owners in providing their employees and their employees' families with an affordable health insurance alternative. In addition, uninsured sole proprietors and workers whose employers do not provide health insurance may also purchase coverage directly through Healthy NY.

The department says that “Aetna's violations included failure to provide adequate written notice of premium increases, failure to provide terminated members with notice of conversion rights, failure to report important enrollment data, and failure to timely and adequately respond to an Insurance Department request for enrollment data.”

Monday, February 1, 2010

New Institutional Longevity and Mortality Risk Group Formed

Institutional interest in longevity and mortality risk continues to grow, according to news that started off the week. A new organization, the Life and Longevity Markets Association (LLMA) has been formed and AXA, Paris, is a member, spokesman Emmanuel Touzeau confirmed.

The LLMA’s founder members are: AXA, Deutsche Bank, J.P. Morgan, Legal & General, Pension Corporation, Prudential, RBS and Swiss Re. The new organization's Web site states that "Longevity expectations continue to increase across the developed world. As they do, defined benefit pension funds, a primary holder of this risk, are having to recognise it in their actuarial valuations. This increases their liabilities and puts their finances under further pressure."

The site explains that "In order to offset this pressure and help secure member benefits, pension fund trustees have been able to pass longevity risk on to the insurance market through longevity swaps and bulk annuities. Whilst this capacity has managed the level of demand to-date, exposure to longevity risk by pension funds in the UK alone exceeds £2 trillion. Demand is therefore projected to increase significantly."

And, the LLMA site adds, "For certain institutional investors, longevity represents a potentially attractive investment opportunity primarily because it is not correlated to non-life, credit and market risks."

The new site is available at: