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October 18, 2011updated 13 Apr 2017 8:47am

Life settlements under heavy attack in the US

In an open letter to the US Securities and Exchange Commission (SEC), the American Council of Life Insurers (ACLI) has called on the regulator to back the SEC life settlements task forces findings and recommend to Congress that it amends the definition of a security under the Federal securities laws to include life settlements.

By LII editorial

In an open letter to the US Securities and Exchange Commission (SEC), the American Council of Life Insurers (ACLI) has called on the regulator to back the SEC life settlements task force’s findings and recommend to Congress that it amends the definition of a security under the Federal securities laws to include life settlements.

The ACLI stressed: “As documented by the SEC task force [on life settlements] and as evidenced by the persistent reports by officials and media of abusive investment schemes involving life settlements, the secondary market for insurance products is dangerous.”

The ACLI also voiced its approval of the task force’s recommendation that life settlements should be excluded from the definition of security for purposes of coverage under the Securities Investor Protection Act (SIPA).

The ACLI explained that the exclusion of life settlements for purposes of SIPA coverage has two benefits:

  • it warns investors of the relatively greater risks of the investment class; and
  • it eliminates the misuse of SIPA coverage as a marketing tool for settlement investment promoters attempting to assuage investor concerns about the dangers of investing in life settlements.

The ACLI also threw its weight behind another recommendation by the task force that securitisation of life settlements should be prohibited. The ACLI is concerned that securitisation will lead to an increase in the occurrence of illegal stranger-originated life insurance (STOLI).

The ACLI stated: “Securitisation of life settlements will exacerbate the STOLI problem. Securitisation is a very effective means of market-making and encouraging rapid expansion of a product, in this case life settlement contracts. Promoters will use capital generated from securitisation to create larger inventories of life settlement contracts which, in turn, will fuel more securitisations and more STOLI.”

The ACLI also voiced its concern regarding reports that public retirement and pension funds are considering investments in life settlements. The ACLI urged the SEC to issue investor bulletins emphasising the risks of investing in life settlements.

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