When Robert Mizzoni, an 83-year old truck driver from Rhode Island spoke before state insurance commissioners here, he put a face to an issue that is so new that it still does not go by one name.
During the hearing of the Life Insurance & Annuities “A” Committee of the National Association of Insurance Commissioners, Kansas City, Mo., those who testified call it by a number of names: Stranger-originated annuities, stranger-originated life annuities and stranger annuity transactions to name a few.
But Mizzoni cut to the chase in describing what he thinks happened when Joesph Caramadre approached his wife Elizabeth at their Cranstson, Rhode Island local Catholic parish and told her to have Mizzoni come and see him about an opportunity to earn some extra income.
Mizzoni told the table of more than 10 commissioners as well as state regulators that the $2,000 check he received and the promise of regular payments by the insurance agent he had known since childhood was making money on his body. “What if I die now? He’s going to collect. I don’t want to see him get that kind of money. Not for bodies. I’m not going to sell my body.”
If Mizzoni was clear on what he said happened to him and to others, regulators were also clear that there are enough tools for them to address any abuses that may surface going forward. And every industry group testifying was clear that STOA needs to be eradicated.
Connecticut Commissioner Tom Sullivan, chair of the “A” Committee, said that the NAIC’s Suitability in Annuity Transactions Model Act and the Viatical Settlements Model Act offered ample protection to consumers in their current state and said that he did not think that it was necessary to reopen either of the models. For instance, according to Sullivan, the Suitability model asks the question “What is the purpose for a purchase?” If there is a misrepresentation, the insurer and producer are not held responsible for their obligations under the contract, he explained.
Currently many states have enacted either the NAIC Viatical model act or the Life Settlement Model Act developed by the National Conference of Insurance Legislators, Troy, N.Y. , Sullivan added. States that do not yet have legislation in place need to adopt either one or the other, he continued.
New Jersey Commissioner of Banking and Insurance Tom Considine said that “the industry holds the solutions.” He asked why insurers were not evaluation life expectancy issues and health status issues. “It is almost as if the insurance industry is in a jail cell and holds the key. Insurance companies have what they need to help themselves, he said. “Companies have all the pieces and they can solve the puzzle. I almost dare to say that it is lazy to not use the tools that they have.”
One of the tools available, according to Ohio Director Mary Jo Hudson, is an April 2009 alert put out by the Ohio insurance department urging companies to put better detection methods in place such as better underwriting of applicants.
Hudson said that particularly if there is a very large death benefit associated with an annuity, the recommendations in the bulletin could help prevent fraud. She noted that in Ohio, there have been annuities that have been purchased to pay for life settlements. It ensures against a loss if the viator lives longer than expected. Such transactions are considered STOLI in Ohio and are discouraged, she continued. But Hudson underscored, there is a legitimate life settlement market. “As we looked at life settlements, there are legitimate ones and there is STOLI. We have to make sure not talking about bans on settlements because legitimate settlements.”
During a panel on insurance and securities, Jim Mumford, first deputy commissioner with the Iowa insurance department, suggested during testimony that current models be examined before there is a decision whether new regulatory tools are needed. He added, that if needed, a general bulletin or other guidance could be developed for producers and companies.
And, Lawrence Kosciulek, FINRA’s Director of Investment Companies Regulation, Washington, noted that although there has been an examination of variable annuities for several years, on February 8 FINRA Rule 23-30, a rule that is broader than just suitability requirements, was put in place. The rule covers annuities, life insurance and bonds, he said. “We have consistently stated that VA s are long-term investments and are looking for members to sell them in this manner.” FINRA members would clearly have to state that a product is an annuity and not leave language unclear, he added. Consequently, FINRA is looking into this matter, he said.
Other potential tools that were cited during the hearing were the Unfair Trade Practices Act as well as anti-rebating laws.
If it was clear from testimony, that the Rhode Island case had potential tools that could be used, it was also clear that there are a lot of gray areas that need further examination. For instance, Rhode Island Insurance Commissioner Joe Torti and Deputy Chief of Legal Services/General Counsel Beth Dwyer said that in the Rhode Island case, the department became aware of the issue when one insurer rescinded the policy and refused to refund the premiums. Dwyer said that the department has a strict rule that funds must be returned regardless of circumstances when a contract is rescinded.
Torti said that although there is a guaranteed death benefit on these variable annuity contracts, they are generally not treated as life insurance and he is not sure if such treatment would have tax implications. And, he said there are significant differences among states on insurable interest statutes and that it would make sense to look at states with good laws.
Another gray area that was discussed is the issue of who is the consumer. Iowa’s Mumford said that Iowa considers the person who purchased the annuity as the consumer and a suitability analysis would not be appropriate for an annuitant who did not put money in the transaction. FINRA’s Kosciulek said that FINRA considers the investor the contract’s owner.
Other panelists offered the following testimony.
--Cande Olsen, representing the American Academy of Actuaries, Washington, discussed how STOLA will require companies to redesign products with guaranteed death benefit riders by increasing charges or underwriting for health, which will in turn increase charges. This will be needed to reflect different investor behavior. She said that for non-STOLA products, the initial mortality rate is 1 percent but for STOLA cases, it approaches 100 percent. STOLA contracts may generate one year of charges, she said. However, non-STOLA contracts may generate ten times that amount over an annuitant’s expected lifetime. The result, she continued, is 1,000 times the average benefit-to-cost relationship.
--From the IRI, Washington, Lee Covington, senior vice president & general counsel, discussed the need to make sure that variable annuities are available to Americans as they prepare for retirement. Karen Alvarado, vice president of regulatory affairs & compliance with the IRI, discussed how some insurers are adding application questions about the relationship of the agent and the annuitant as well as enhanced monitoring if a death occurs within a year.
--From the life settlement industry, Doug Head, executive director of the Life Insurance Settlement Association, Orlando, Fla., stated the organization’s opposition to STAT schemes, noting that “they are illegal and must be banned to the extent that they are not banned already. Our members do not participate in them.” He said that insurers need to take accountability for not putting in place sufficient safeguards to detect the practice and said that STAT should not be confused with the legitimate life settlement market. Head recommended that suitability standards should require an evaluation of the health of the annuitant. As a worst case scenario, a new model prohibiting STATS could be developed, he said. However, the viatical model law should not be reopened, Head continued.
Brian Staples of RIGHT LLC, Versailles, Ky., urged regulators to distinguish between the GLB property rights issue discussed during the development of Compact Commission standards and STAT which and STAT which he said is an entirely different issue.
His remarks were followed by Kathleen Birrane, general counsel with Maple Life Financial, Bethesda, Md., who said that STAT and STOLI should be condemned but the secondary market should be preserved. She also noted that there is no “discernible secondary market for annuity products.”
--From Gary Sanders, vice president for securities and state government relations of the National Association of Insurance and Financial Advisors, Falls Church, Va., came a call to develop more clarity before changing any laws and to be aware that a few more questions on an application will not stop misrepresentation.
While Caleb Callahan, vice president of investment services with ValMark Securities, a broker/dealer and life general agency based in Akron, Ohio, which works in both the primary and secondary market, also cautioned against creating new laws citing both insurance and securities laws that can effectively minimize the situation.
--Representatives of the life insurance industry also suggested that new laws may not be needed at this point. Rather, existing models should be studied and enforced, according to Kelly Ireland, senior counsel with the American Council of Life Insurers, Washington. Ireland said that insurers are taking steps to prevent STOA including changing business processes, underwriting standards, examining an applicant’s health as well as education and training for distribution channels.
Michael Lovendusky, associate general counsel with the ACLI expressed concern that STOA is not limited to the Rhode Island incident but goes far beyond that. It raises the question of whether STOLI is moving to annuities, he continued.
He said that more data is needed from the secondary market and a recent decision pitting Coventry against the Florida insurance department which found that Florida can collect data, should help make that possible. So, it will be possible, he said, to find out questions including: how many policies were settled; how many insured lives were settled; how many were settled through premium financing; the total face value of policies settled and how many settled contracts have face amounts of $1 million or more.
Iowa’s Mumford asked Lovendusky whether insurable interest should be applied to annuities and the tax implications and Lovendusky said that the ACLI is studying the issue and intends to have recommendations possibly by the August NAIC meeting and definitely by year end.