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.”

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