US life settlement industry body the Life Insurance Settlement Association (LISA) has issued a strong condemnation of the American Council of Life Insurers’ (ACLI) stance on stranger-originated life insurance (STOLI). At issue are three STOLI Alerts published this year by the ACLI in which it warned of what it views as the misuse of life insurance.
The LISA, which is the life settlements industry’s oldest and largest body, represents 160 members, while the ACLI’s 373 member companies account for 93 percent of the US life insurance industry’s total assets.
ACLI’s president and CEO, Frank Keating, recently explained the council’s perspective. “STOLI involves investors inducing individuals, usually senior citizens, to purchase life insurance and then sell it to the investors, who expect to profit when the seniors die. The investors have no insurable interest in the lives of the seniors. STOLI is widely agreed to represent an abuse of life insurance,” he said.
The STOLI Alerts were issued ahead of the National Conference of Insurance Legislators’ (NCOIL) deliberation of the National Association of Insurance Commissioners’ (NAIC) draft Life Settlements Model Act that the ACLI has stated it hopes will lead to the abolition of STOLI.
However, the LISA believes the STOLI Alerts have been misleading. “The STOLI Alerts are put forth in broad mailings to agents and policymakers as if they are factual and documented,” said LISA’s executive director, Doug Head. “The truth is that these STOLI Alerts are, at best, highly misleading and inconsistent efforts. The STOLI Alerts contain assertions which contradict the ACLI’s own positions and which misinterpret the cases and examples which they cite. We think it’s important that the public and policymakers be alert to the shortcomings of the STOLI Alerts.”
Going a step further, the LISA challenged the ACLI’s assertion that it was in favour of a complete abolition of STOLI. In a fact sheet accompanying Head’s statement, the LISA stressed: “The ACLI knows that the NAIC Model Settlements Act it promotes today does not address STOLI.” Head commented: “We note that the proposed NCOIL amendments which directly attack STOLI arrangements have not received ACLI support and we wonder at this inconsistency.”
Supporting its assertion of the ACLI’s inconsistency, the LISA fact sheet cited an example contained in a STOLI Alert published in June. In the edition, said the LISA, the ACLI grounded its support for the NAIC model’s efforts to deter STOLI on the basis of important Supreme Court cases.
The LISA said one Supreme Court case described at length in the STOLI Alert was Warnock versus Davis, a case heard in 1881. The LISA said that the STOLI Alert correctly stated that the court found that “an arrangement in which a group of investors agreed to finance the purchase of a life insurance policy in exchange for receiving the lion’s share of the death benefit violated the public policy against wager policies and was invalid”. In short, the court had ruled that the arrangement was STOLI and thus invalid.
The LISA continued that the STOLI Alert also correctly noted the facts of the case. These were that the insured would purchase a large life insurance policy, the investors would pay the premiums, the insured would have no liability to repay the investors and the investors would keep 90 percent of the death benefit, with the remaining 10 percent going to the insured’s widow.
Hammering home its point, the LISA stated: “STOLI Alert, ignoring the irony, today supports a model act which exempts from regulation a scheme much like the arrangement invalidated by Warnock [versus Davis].”
In conclusion, the LISA stated: “The publication [STOLI Alert] is about attacking the secondary market, which competes with carriers and provides value for consumers. STOLI Alert is a ruse for life insurers to further their protectionist agenda against life settlements through their support of a model which they uniformly admit fails to address the fundamental concerns with STOLI.”