STOLI Puts Settlements on the Rocks

Life settlement managers should brace for increased oversight as state lawmakers debate imposing new regulations on the industry in the coming months and Congress considers broader insurance powers.

As shady practices increase, new regs focusing on stranger/investor originated life insurance policies (STOLI) could seize up origination of all types of life settlement activity. This year also threatens the possibility of federal regulation coming to the life insurance and settlement industry, which could have huge implications for professionals.

The combination of local and federal changes will bring regulatory risk to the forefront of investor considerations.

“There is a lot more angst out there among investors,” said Brian Casey, partner at Locke Lord Bissell & Liddell, at the recent Insurance Linked Securities Summit, sponsored by IQPC. “In the short term there is increased regulatory risk, which investors don’t want to be involved [with].”

Just this month, new legislation moved forward in Georgia, Florida and California that would create major hurdles for the life settlement industry. Much of the legislation is aimed as STOLI practices such as firms that solicit the elderly to originate life policies in return for a lump sum payment.

Many states are using legislative language sponsored by the National Association of Insurance Commissioners (NAIC) and the National Conference of Insurance Legislators (NCOIL).

The NAIC proposal looks to prevent STOLI practices by placing a five-year ban on settlements using non-recourse loans. The NCOIL model would ban non-recourse financing altogether.

Over 30 states introduced legislation focused on STOLI in 2008, said Rachel Coan, a partner with Morrison & Foerster. Of the 13 states that adopted STOLI measures, eight used the the NCOIL model and three used the NAIC model language. Two states used a hybrid of both.

“The lack of common regulation makes a very confusing picture for investors, providers and brokers,” said Coan, adding that one of the few common threads among state regulation is more stringent licensing requirements for settlement providers.

The possibility of Federal oversight of the settlement industry is also real, as Congress mulls an optional federal charter or the creation of an Office of Insurance Information within the Treasury Department. Coan said that although federal oversight may be inevitable, it is likely several years away.

In the meantime, the settlement industry will need to deal with the compliance confusion and investor concern over the new STOLI laws.

“The regulatory risk in the context of STOLI is something that investors do not want to see. They want comfort that the asset is real and not subject to challenge,” said Casey.

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