Saturday, June 26, 2010

Insurance Groups Take Stock of Financial Reform

Insurance trade groups are weighing in on major financial service reform that will become reality now that the conference committee on financial services regulatory reform has reached agreement on H.R. 4173.

The bill, which will now be known as the Dodd-Frank Act, is a big win for President Barack Obama who promised to reign in excesses in the financial services industry.
And while the legislation has not yet been published in final form and some industry issues will be addressed in a formal rulemaking process, here is an initial take on the bill.

American Council of Life Insurers, Washington

The ACLI maintains that derivatives are critical to helping manage claims which are long term and that state regulation is doing a good job of managing derivatives. The bill creates new regulatory responsibility for the Securities and Exchange Commission and the Commodity Futures Trading Commission to create a clearinghouse and definitions such as “swap participant” and “major swap participant.” ACLI believes that it can make a case that derivatives reduce risk in insurance products and should be excluded from those definitions.

ACLI says it supports a federal insurance office within the Treasury Department with expertise in insurance to advise Congress and the administration on insurance related issues and to help negotiate international regulatory equivalent agreements.

A provision that establishes a resolution authority and how it will affect insurers, according to the ACLI, still needs to be clarified. ACLI notes that insurers contribute to guaranty funds and that under the new law that will continue. And the Federal Deposit Insurance Corporation would only step in the unlikely event that an insurance commissioner was unable to handle the insurer insolvency.

And on the issue of assessments to pay for the new law, the ACLI believes that since it is risk-based, it should have little effect on the industry.

American Insurance Association, Washington

The AIA says that in most instances, the new law recognizes that the property-casualty industry did not pose systemic risk. It points out that state-based regulation remains in place and the existing guaranty fund system continues to protect policyholders.

The organization expresses support for the federal office of insurance but opposes an assessment provision that pre-funds obligations.

National Association of Insurance and Financial Advisors, Falls Church, Va.

NAIFA supports a provision that allows the SEC to move forward with as a study examining the standard of care and the impact of differing regulations for broker-dealers and investment advisors. However, it expresses disappointment over a best interest standard not directly tied to the study even though it supports the idea that no broker-dealer and their registered reps can violate those standards because they sell proprietary products and receive commissions.

National Association of Mutual Insurance Companies, Indianapolis

NAMIC says it is pleased that the new law recognizes that the P-C industry is not among the causes of the financial crisis and that state-based regulation is left largely intact.

The organization also says that the FIO will remain an information resource for policymakers rather than duplicating regulation done by state regulators.

Property Casualty Insurers Association of America, Des Plaines, Ill.

While noting that improvements have been made to prevent duplicative regulation with the FIO proposal, PCI expresses concern over the long-term impact on the competitiveness of the U.S. financial services sector. It notes that state regulation provides the best protection for consumers.

Thursday, June 24, 2010

Moody’s Says Things Are Looking Up for Life Insurers

A year can and does make a substantial difference, as a recent Moody’s Investors Service report suggests. The report from the New York-based agency says that improving business and financial fundamentals are being reflected in life insurance companies’ stock prices and that that improvement has helped restore access to the equity and debt capital markets, according to Ann Perry and Manoj Jethani, the Moody’s analysts who authored the report.

Among the findings in the Moody’s report:

--“In contrast to first quarter 2009, operating earnings and net income for the same period in 2010 were positive for almost all of our tracked companies, producing dramatic improvements of $9 billion and $11 billion in operating income and net income, respectively, for the group of 19 life insurers;”
--“Our group of companies took a total of $1.7 billion in other than temporary impairments in the first quarter of 2010 compared to $6.5 billion in the first quarter of 2009;”
--“In fact, more than half of our group of 19 companies moved into net unrealized gain territory, and all companies showed marked improvement. The net unrealized gain/loss position of about two-thirds of the companies strengthened by over $1 billion each, with MetLife and AIG leading the way with $13.8 and $13.5 billion of reduction in their unrealized loss positions, respectively.”

Wednesday, June 23, 2010

AG 38 Sunset Request Gets Weak Response

A sunset provision in Actuarial Guideline 38, a guideline for UL policies with secondary guarantees, will go away at the end of the year unless regulators agree to extend it.

But during a June 22 session of the Life & Health Actuarial Task Force, the group of the National Association of Insurance Commissioners, Kansas City, Mo., showed lukewarm interest in extending the provision.

The 2010 sunset was put in place because regulators, actuaries and industry anticipated that a principles-based approach to reserving would be in place by the time of the sunset.

The development of PBA has taken longer to develop than initially thought. According to John Bruins, a representative with the American Council of Life Insurers, Washington, who requested the proposal to remove the sunset provision, its removal would give all parties working on PBA the flexibility to continue work without having to address renewal of a sunset date if work extended beyond the next sunset.

He said that it could be a process of about five to six years before PBA would become effective. The reason, according to Bruins, is that it would take at least 3 years at best to get adopted in the 42 states necessary before it could become a requirement. After such adoption, there would be a necessary transition period, he added.

Nebraska regulator John Rink asked why the sunset needed to be removed completely and whether PBR is moving forward. And, he raised the issue of whether removing the sunset provision entirely would remove the incentive to get the project completed. Bruins replied that he did not think that was the case.

When Larry Bruning, Kansas chief actuary and chair of LHATF, asked for a motion, his request was met by a long silence. The ACLI’s Paul Graham then asked if LHATF would at least make the motion to expose the proposal for 30 days. The motion was made by Nebraska and seconded. Graham added that the ACLI would not have a problem with a proposal that included a definite sunset. He said that it could be six to eight years before PBA was fully in place and said that if LHATF wanted to put a six to eight year sunset in the actuarial guideline, that would be acceptable to ACLI.

The motion to expose the proposal for 30 days was carried with one objection from New York’s Bill Carmello.

Sunday, June 20, 2010

NCOIL Offers Input on H.R. 4173

This past week, state insurance legislators asked Congress to make sure that H.R. 4173 requires a material interest be present in “naked” credit default swap (CDS) transactions.

In a June 15 letter to Rep. Barney Frank, chair of the U.S. House-Senate Financial Reform Conference Committee, the National Conference of Insurance Legislators, Troy, N.Y., says that CDS is often defined as “insurance” against negative credit events and should be regulated as insurance.

The letter from NCOIL President Robert Damron, a state representative from Kentucky and New York Assemblyman Joseph Morelle notes that NCOIL developed a Credit Default Insurance Model law that would outlaw naked swaps “by requiring material interest as a prerequisite for buying protection. It also contains standard insurance requirements regarding company licensing, capital and surplus, and policy forms and rates, among other things.”

The letter goes on to state that “Not only does H.R. 4173 ignore the need for material interest and allow naked swaps, it goes further to effectively prevent state efforts to require material interest.”

Wednesday, June 16, 2010

A.M. Best Introduces Life Settlement Simulation Model

A.M. Best, Oldwick, N.J.has announced a life settlement simulation model called ‘Best’s Life Settlement Cash Flow Model. The model is now available for free download at Settlement Model .

The model is an analytic tool that will help entities that have accumulated pools of policies to better understand the stochastic nature of mortality-based cash flows, says Emmanuel Modu, Best’s managing director & global head of insurance-linked securities. While investment banks have their own simulators, other investors will find this tool useful, he says.

For instance, Modu explains that often joint lives policies are not assessed correctly with investors simply looking at higher life expectancy reports.
The benefit of this tool is that it is a middle step that helps investors determine whether they want to proceed with a rating, he continues.

Modu says that the model doesn’t replace the need for LEs since medical underwriting is an input needed to determine the mortality-based cash flows.

A Webinar will be held on July 22 to help users better understand the model, according to Modu.

The model offers a monthly reading of death benefits and premiums for a pool of policies using mortality rates based on gender and smoking status; mortality ratings provided by medical underwriters; and duration to calculate cash flows associated with a life settlement portfolio.

Specifically, the model quickly generates:
--up to 5,000 simulations of death benefits and premium payments on up to 1,000 life settlements (including life settlements based on “second-to-die” insurance policies) using the Monte Carlo statistical methodology;
--expected death benefits and expected premiums for each life settlement using the probabilistic approach;
--a monthly mortality rate vector associated with each life settlement; and
--a graph of portfolio expected cash flows.

Tuesday, June 15, 2010

Regulators Advance Temporary Commercial Mortgage Capital Factors

A temporary measure to increase the cushion for life capital requirements was advanced by state insurance regulators while a permanent solution is developed, according to a discussion among regulators of the Kansas City, Mo.-based National Association of Insurance Commissioners’ Capital Adequacy “E” Task Force.

The temporary solution, according to regulators, can be revisited if companies’ capital position deteriorates or commercial mortgages show a higher deterioration than experts are predicting.

The change will be implemented for 2010 and 2011. It raises the floor on the mortgage factor from 75% to 80% and the cap from 125 to 175%. The American Council of Life Insurers, Washington, said that it would be amenable to that but not any amount beyond that spread.

By doing so, it would raise the amount of capital by 10 percent. Steve Ostlund, an Alabama regulator raised concern that the commercial mortgage market was a lagging indicator that may drag down capital levels even though the economy seems to be showing signs of improvement. He posed the question of why the RBC charge should not be raised to 4% in 2011.

But both New York regulator Lou Felice and Pennsylvania regulator Steve Johnson said that the industry is being given a chance to get focused on a long-term solution. If that doesn’t happen, then regulators can take more aggressive measures to ensure proper capital levels for commercial mortgages, they said. Johnson also said that the industry had done a good job of demonstrating what is in its portfolio today as well as how this commercial mortgage stress period is different from a severe stress period that occurred in 1990-92.

Saturday, June 12, 2010

Cipinko Named New Executive VP as Part of CCIA Restructuring

Scott Cipinko is the new executive vice president of the Consumer Credit Industry Association. Cipinko was named as part of a reorganization of the organization, based in Glenview, Il.

Cipinko served as CCIA general counsel and secretary from 1989-1993. More recently he served as the executive director of the National Alliance of Life Companies, the Life Insurers Council and the Life Insurance Finance Association. He also served as vice president of LOMA.

Bill Burfeind, the previous EVP will continue as a consultant after leading the association through its reorganization and will concentrate on a staff restructuring and federal legislative efforts. Burfeind has served the association for 31 years.

Elizabeth Kastigar will serve as vice president and legislative & regulatory counsel and Stephanie Brandt, director of member services.

Thursday, June 10, 2010

Insurers Tell FASB Accounting Projects Have Them Frustrated

New York
Insurers expressed frustration and concern to a representative of the Financial Accounting Standards Board, Norwalk, Conn., during the annual insurance conference presented by Standard & Poor’s Corp., New York.

The concern is over an Insurance Contracts project that the FASB is currently working on and an exposure draft for financial instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities. The FASB projects could have a negative impact on both the insurance and life settlement industries.
During the session, Jerry de St. Paer, chairman of the Group of North American Insurance Enterprises, New York, said that there is still an opportunity to let the FASB know the major impact the disconnect between assets and liabilities will have on insurers’ balance sheets.

He pointed out the difficulty it would cause Canadian insurance groups who currently use a Canadian Asset-Liability model which does not use valuation based on fair value. The new model would result in not valuing assets and liabilities in conjunction, according to de St. Paer.

He also noted that certain bank products are allowed to use deferred acquisition costs and the capitalization of expenses but a 4-1 FASB Board vote disallowed the same treatment for insurers.

William Chrnelich, partner-assurance and business advisory services in the New York office of PricewaterhouseCoopers, said that a signed stack of insurance contracts represents revenue to insurers as well as the labor cost of getting agents to sell those contracts and that labor cost should be reflected in the cost of the contract. It is not an expense but a labor cost associated with completion of that sale, he added.

And, Craig Mense, executive vice president and CFO with CNA, Chicago, said that “We don’t think accounting for the property-casualty industry is broken, so don’t try and fix it.” It would make comparability harder for investors and shareholders, he added.

In response, Mark Trench, FASB project manager, explained that one of the issues with DAC is that it doesn’t meet the definition of an asset and that an attempt to define it as an asset “bothers the Board.”

In response, Chrnelich asked whether the Board was ready to go to Detroit and say that labor is not part of the cost of a car.

Trench said that “in this instance, the Board is not consistent.”

De St. Paer said that if the Board persists in this approach, it will create volatility which “will drive ROEs through the floor.” Consequently, “the cost of capital will almost certainly go up,” he added.

One audience participant asked which investors the Board had consulted in making its decision. Trench responded that FASB does have investment outreach and that investors have different perspectives on the issue. For instance, he said that if you talk to property-casualty insurers, they don’t want to change accounting treatment of claims and loss ratios. However, Trench continued, life insurance analysts in Europe say that current accounting is very opaque.

De St. Paer said that there has been endless talking to the FASB and the International Accounting Standards Board, London. He said told audience members what he told the Association of Insurance Financial Analysts, New York, several weeks ago: that in order to effect change an organized letter writing campaign is needed.

He said that the CFA Institute, Charlottesville, Va., is a strong proponent of fair market accounting and has been very organized about writing letters supporting the accounting change. He urged those in the insurance industry to do likewise to express concern over fair value accounting and the impact it could have on the insurance industry.

PricewaterhouseCoopers’ Chrnelich said that the changes would go beyond technical accounting but would impact executive compensation programs, how companies could compensate employees when there were losses while a company is growing its business and how the insurance industry interacts with the investment community. “Company control systems would have to change. The amount of change will be tremendous,” he said.

The FASB’s Trench said that if audience members wanted to speak out and didn’t have time to write a letter, the FASB has staff that would take their comments over the phone. He urged concerned attendees to call the FASB.

Wednesday, June 9, 2010

Seeing Beyond the “Smoke and Haze”

New York
If life insurers can look beyond “the smoke and haze” of current economic conditions and focus on “powerful macro-economic forces,” they stand ready to meet the needs of consumers, according to John Strangfeld, chairman, president and CEO of Prudential Financial, Inc., Newark, N.J.

Strangfeld was one of a panel of life insurer leaders who discussed what the industry needs to do to meet changing times and fulfill consumer needs. The panel was the lead session for the annual Standard & Poor’s Corp. Insurance Conference held here from June 8-10.

Demographics and Social Security benefits that will be a smaller proportion of the funds needed to ensure retirement are among the factors that leave life insurers well situated to help meet consumer needs with products and services, according to Strangfeld.

Retirement security is “just as important as health care but there is not the same instinctive reaction,” Strangfeld told the several hundred S&P conference attendees.
John D. Johns, chairman, president and CEO with Protective Life Corp., Birmingham, Ala., agreed that there is opportunity but said that insurers must adapt to changes in our society. For instance, Johns said that the profile of the typical family is changing. The “Ozzie and Harriet” family is being replaced by non-traditional families, according to Johns. Half of American children live in non-traditional families, he continued.

Other factors such as the increasing concern over the solvency of states and municipalities may change the demographics and where people move tempered only by the fact that homes that are “underwater” because of a decline in the value of housing might force people to remain where they are, he said.

What life insurers can provide, according to Ted Mathas, chairman, president and CEO of New York Life Insurance Co., New York, is “stability and certainty.” There is a strong opportunity to bring back “bedrock principles” such as the cash value of life insurance because of the “institutional trust and longevity behind them.”

But, according to Protective Life’s Johns, the industry has done a “fairly poor job of meeting the unmet needs of the marketplace. There needs to be a focus on innovation and differentiation. There is too much commoditization. Products all look the same.” As an example, he cited his daughter’s desire to buy life insurance on the Internet. Johns said that he tried to explain that while she could make the initial contact on the Internet, it would be necessary to work with a company representative. “Her generation doesn’t want to buy life insurance the way we sell it.” The current generation doesn’t want current buying requirements such as medical underwriting, he explained to the S&P audience.

Other issues Johns raised included the need for life insurers to return to simplicity and reduce leverage. He said that some companies were too concerned that the reserving that they are required to maintain are too high and require too much liquidity.

Prudential’s Strangfeld said that longevity business is becoming a larger part of his company’s business mix compared with mortality business. When he listens to tapes of conversations with customers, he said that he realizes that “a high degree of complexity is not the solution for most of these people” and that in order to meet this need there must be more simplicity.

Another issue raised by Protective’s Johns was that there is “way too much financial leverage in this industry.” Simplifying businesses and making them more transparent would increase the equity value of insurance stocks, he said.

New York Life’s Mathas said that there has to be an expectation of less leverage because a 15 percent return is a “false world.”

Saturday, June 5, 2010

Oliver Wyman Examines Total Asset Requirements for Variable Annuities

A leading actuarial firm is recommending that refining components of regulatory capital and reserve requirements for variable annuities as regulators strive to complete a principles-based approach to reserving later this year.

The presentation was made during a Webinar offered by Oliver Wyman on June 2 titled “Emerging Issues with AG 43 and C-3 Phase II RBC for variable annuities.”

Among the findings discussed during the Webinar is the impact of hedging can often be counter-intuitive. For instance hedging can potentially increase reserves and sometimes overall total asset requirements (TAR.) The report, prepared by Wyman, also finds that the Standard Scenario, a floor that was put into place by regulators to ensure conservatism, “dominates more that may have been originally intended.”
Findings discussed during the Webinar also suggest that the level and volatility of capital requirements have increased with the potential for cyclical changes in results.

One of the consequences of the new regulatory effort could be a greater demand for “engineered capital markets and reinsurance solutions, with an attendant higher cost,” according to the Wyman report.

A surprising finding was that in spite of “well developed, time-tested hedging programs,” a third of companies surveyed did not see a hedging benefit.

The Webinar touched on how the recent financial crisis offered the industry insight into how sensitive the new principles-based approach is to market volatility.
Leading up to 2008, companies generally would have had no capital requirements but these requirements ballooned at the end of 2008, the Wyman report notes.

The question that surfaces is whether the sensitivity is appropriate given the purposes of the solvency balance sheet, according to Oliver Wyman. It continues, saying that “Should markets fall again, requirements will rise steeply—however, a company that is hedging should not see its excess capital position change materially.” Even so, volatility of capital requirements could be exacerbated, the firm adds.

Wyman suggests refining these principle-based regulations and submitting amendments to the National Association of Insurance Commissioners, Kansas City, Mo., by year-end 2010.

Wednesday, June 2, 2010

FINRA Panel Fields Questions on Suitability Rule 2330

FINRA Rule 2330, which sets up guidelines for the sale of deferred variable annuities, was the topic of a panel discussion on annuity suitability here at FINRA’s annual conference.

Last year, the Securities and Exchange Commission, Washington, approved several amendments which took effect in February 2010. Recommendation and training requirements were among the specific topics that the panel discussed, fielding questions from attendees participating in the session.

VA customers need to be informed about the expenses associated with these contracts and need to benefit from features in the contract, said Larry Kosciulek, director, FINRA Investment Companies Regulation, Washington. Not only should a VA be suitable for a client, but the subaccounts within the VA as well, he added.

In response to an audience question about what kinds of fact patterns set off concerns over suitability, Joseph Savage, FINRA’s vice president and counsel-investment companies regulation, said that a pattern of transactions such as all the clients of a registered rep buying the same annuity features and subaccounts would be one instance that would raise suitability concerns.

Another red flag would be raised if there is an elderly customer with a limited net worth, Kosciulek added. But he continued, there needs to be individual consideration of each case. For instance, if someone is in ill health at age 55 and another consumer is a tri-athlete at age 70, it raises the issue of how to look at retirement and a long-term investment, Kosciulek explained. “We are concerned with the sale of a deferred product at an advanced age when it is difficult to take advantage of the product’s features,” he said.

When asked about 1035 exchanges, Kosciulek responded that it requires a cost benefit analysis and that the rep should be able to demonstrate that the new contract economically benefits a customer and that it is better than the old contract. There needs to be reasonable steps taken to get background information to demonstrate that the annuity is suitable for the customer such as the intended use of the annuity and the consumer’s time horizon, according to Kosciulek.

A key part of the new rule is training, Kosciulek continues. Both the rep and the supervisor need to know about the product being sold, he says. So, if the product offers living benefits, “I say you better understand the pros and the cons if you are making a recommendation.”

As an example, FINRA’s Savage said that a rep would need to know the difference between the account value in a customer’s contract and the withdrawal base used to determine the withdrawal benefit.

When asked by an audience member if FINRA is seeing sales abuses to those who are too young, he responded that there was one case of a high school student who needed money for college and was sold a VA. However, he was careful to note, that cases must be individually examined. So, for instance, the sale of a VA to a 30-year old may raise questions but may be tied to legitimate reasons for the sale such as investing part of an inheritance.

Kathy VanNoy-Pineda, executive vice president and brokerage chief compliance officer, LPL Financial Services, Boston, advised reps to keep good records. She said that if a complaint or a legal case arises, it will be necessary to demonstrate a reason for a recommendation and why the product and even the subaccounts are suitable. “If you can’t prove you’ve had these discussions, then you may as well assume that they didn’t happen,” she cautioned.

And, VanNoy-Pineda continued, the same applies to training sessions. Training sessions need to be formalized, scripts of training kept and a record of what script was used for the audience being trained, she added.

And, in response to a question from the audience, VanNoy-Pineda said that if in the course of training it became apparent that a broker did not understand features of a VA, her firm would go back and examine that broker’s book of business and determine if there is anything that the firm needs to do.

When asked about regulation of insurance companies, Jim Mumford, first deputy commissioner, Iowa Insurance Division, said that a new suitability model law developed by the National Association of Insurance Commissioners, Kansas City, Mo., holds a company responsible for any unsuitable annuity sales. The insurer can ask a broker-dealer to set up a system to detect unsuitable sales but the insurer is still required to monitor the system, Mumford explained. The insurer cannot contract out responsibility but rather only the monitoring function, he added.

During the panel discussion, FINRA’s Savage also noted that FINRA is interested in keeping a close eye on stranger-originated annuity transactions (STAT), because there are not many situations in which buying for a stranger would be suitable.

This article was first published in Life Settlement Review.

Tuesday, June 1, 2010

FINRA Panelists Detail Complexities of Life Settlements

Life settlements are complex transactions that need careful consideration before an entity allows its representatives to offer them to clients, a panel cautioned during the annual FINRA conference here.

The complexity and number of potential issues associated with selling them was pivotal to a decision by John Hancock Financial Network, Boston, to continue to prohibit its sales force from participating in life settlement transactions for compensation, according to Thomas Horack, chief compliance officer with John Hancock, the panelist explained.

Broker-dealers are also looking into the issue, according to Brian Casey, a panelist and partner with the Atlanta office of Locke Lord Bissell & Liddell LLP. Casey noted that in the last two weeks, he has received five calls from broker-dealers asking whether they should be allowing their registered representatives to participate in these transactions, what the risk would be if they are permitted to offer them and how policies and procedures can be put in place if life settlements are offered.

John Hancock’s Horack explained that in 2008 the insurer at the behest of its field force did a thorough examination of whether its agents should be allowed to offer these transactions to their clients. Ultimately, after an extensive examination, the company decided that its field force would not be allowed to offer a life settlement. The reason, he said, was that a life settlement is a complicated transaction that the company did not want to supervise. However, if a client expressed interest in a settlement, producers could offer contacts that would be able to offer that service.

Horack detailed the decision making process for attendees. The issue was examined in the same way that due diligence is given to any potential entry into a product market, he said. Among the initial questions that surfaced were whether the company wanted to set up an infrastructure; and whether there were legitimate cases in which a settlement may be a viable alternative such as business owners who have buy-sell agreements using insurance and are faced with a business that dissolves, a policy’s poor performance or clients who can’t afford premiums any more.

If a client is considering a life settlement, John Hancock looked at how to determine whether a client was rushing into a life settlement and whether reduced
paid up insurance or a 1035 exchange may be more appropriate.

Other issues, he said were reviewed included death benefit issues, tax issues, how a settlement may impact Medicaid benefits and the possibility that funds from a settlement may be available to creditors. In addition, Horack said, the infrastructure, licensing and disclosure requirements helped the company decide that it was not a business it wanted to enter. The business would have been an accommodation to agents and not a big revenue producer, he continued.

Under one model that was considered, he said, Hancock would have brokered its own policies or the policies of other carriers. Another model that was considered, Horack added, was working with life settlement brokers and broker-dealers with a life settlement component which would supervise activity and give the insurer reports. In the course of this due diligence, he said, it also became apparent that a life settlement is not a quick transaction. And, he added, it was not going to be a core business like life insurance and mutual funds.

Locke Lord’s Casey responded that another factor that would now have to be evaluated is the change to the cost of insurance that may be surfacing in the market. And, Horack continued, Hancock would have to monitor suitability and whether agents would turn to life settlements before they explored other solutions. He said it concerned his company that an agent would either knowingly or unknowingly become involved with STOLI (stranger-originated life insurance), leaving Hancock to figure out what to do with commissions and refunding premiums.

He also expressed concern over potential litigation of heirs of the deceased insured and the “real or perceived” compensation rate which was said to be about 20-30 percent, and how to handle a potential situation if a rep got paid commission on the settlement of a contract and then on the sale of a mutual fund or an annuity.

That issue was raised by Larry Kosciulek, director of FINRA Investment Companies Regulation, Washington, who asked why compensation is so high when most commissions for other sales are in the 5-6 percent range.

After these considerations as well as others such as reputational risks, reduced lapse rates and lower profits, Hancock considered the possibility of working with settlements with contracts that had features including a minimum age of 65, a minimum face amount of $250,000, a policy that was in force for five years; and a 10%cap on commissions with anything above that going toward the client offer. The contracts would be restricted to Hancock’s registered reps.

But in the end, he said, the company decided not to proceed because of continued concerns over the complexity of the transaction and the ability to supervise the transactions. And there was uncertainty over whether Hancock’s field force was more concerned with a revenue source or offering an accommodation to a client, Horack said. Finally, he said the due diligence was finished in the fall of 2008, during the deepest part of the recession.

The complexities of the life settlement market detailed by Horack’s analysis were reinforced by Locke Lord’s Casey who said for instance that beneficial interests in a life insurance trust and puts on beneficial interests are open to interpretation, although he believes that these transactions are life settlements.

Another instance that adds a wrinkle to the business is how different states define life settlement broker. In states such as Texas the definition is broad with tracking services and analyzing confidential viator or settlor information included within its scope.

What is more clear cut, he said, is that the industry is no longer the ‘Wild West’, but rather an industry regulated in 38 states covering over 80% of the population, with New York recently on board and California about to come on board on July 1.

A question from the audience raised the issue of whether a firm that does not allow its rep to participate in life settlements risks breaching a responsibility to a client by discussing all financial options. Horack reiterated that a broker is allowed to refer a client to others but can’t participate in the transaction. And, Casey responded that the life settlement law does not create that duty when you are a life settlement broker. Kosciulek said that FINRA doesn’t require a firm to sell anything and that a firm can’t allow reps to sell something that they don’t understand. He said that if there is a lack of understanding, there is a lack of ability to supervise and if you can’t supervise, then you can’t sell. He says that this is his response when he receives inquiries from the life settlement industry about why there isn’t a requirement to mention the life settlement option.

This article first appeared in Life Settlement Review.