Life Settlement Industry Opposes Stranger-Originated Annuities

Category LISA
Posted Date 05/05/2010
Publish By Marketwire
Publish Date 05/05/2010
Rating Neutral

LISA Calls on Industry and Policymakers to Take Action and Eliminate STATs 

Marketwire, 5 May 2010

Orlando, FL

The Life Insurance Settlement Association (LISA) explained today its opposition to Stranger-Originated Annuity Transactions (STATs). These are schemes in which strangers solicit and finance the purchase of certain variable annuities using individuals of very poor health as "straw man" applicants. The stranger then profits by collecting the annuity's guaranteed minimum death benefit when the individual dies.

"LISA adamantly opposes STAT schemes and believes that they should be banned because they harm life insurance consumers," said Doug Head, Executive Director of LISA, in announcing the organization's position and recommendations for legislative and regulatory action against STATs.

In the one well-known STAT scheme, a licensed and appointed insurance agent appears to have sought out terminally ill individuals and then paid these individuals to serve as annuitants for variable annuity contracts. The expectation is that the annuity's guaranteed minimum life benefits will increase and generate a potentially significant windfall for the stranger when the terminally ill individual dies.

Based on news reports and regulatory bulletins on STATs, appointed agents have taken out advertisements in newspapers, or taken to the hallways of nursing homes and hospices, soliciting terminally ill individuals with short life expectancies to participate in these annuity schemes. To avoid scrutiny, these agents will limit the size of the annuity to ensure that the dollar amount of the annuity falls below specific underwriting guidelines. Promoters will often also establish a trust or other "shell" to be used as the designated beneficiary in order to hide the true identity of those who will benefit upon the annuitant's death.

LISA's now urges state policymakers to implement a four-point action plan to eradicate STAT transactions.

First, LISA calls on the National Association of Insurance Commissioners (NAIC) to join the National Conference of Insurance Legislators (NCOIL) to develop and adopt a new model law prohibiting STATs. A new model, similar to a life settlement model act, would place consumer interests first by protecting the public against STATs schemes, prohibiting pre-arranged sales of annuities, and ensuring that lawful owners of annuities are protected when they seek to sell unwanted, unneeded, or unaffordable annuities.

Second, LISA urges state lawmakers to adopt suitability standards for annuity sales that require life insurance companies to affirmatively evaluate the health status and life expectancy of any annuitant as a pre-condition to issuing an annuity. "There is no reasonable circumstance that would justify an insurance company issuing an annuity to someone who is terminally ill or in severely poor health," said LISA President Russel Dorsett.

Third, LISA supports establishing an insurable interest requirement between the individual annuitant and the owner of the annuity at the time the annuity is issued, as is required at the time of issuance of a life insurance contract. This would protect consumers against STATs schemes and abuses. "Heightened suitability standards and insurable interest requirements would have prevented the STATs scheme that has generated so much news," Head said.

Finally, LISA encourages state regulators to direct insurance companies to take proactive and preemptive measures to detect and prevent STATs from ever occurring. In April 2009, the Ohio Department of Insurance called on all insurance carriers "to put safeguards in place to prevent or limit their exposure to stranger-originated annuity transactions" and suggested the implementation of several important measures designed to stop STATs, including a focus on appointed agents who may be involved in these transactions, a review of how the annuity is to be funded, and, importantly, a "review all annuity applications to ensure specific questions are posed with regard to an annuitant's health status." Other states should take similar action and urge or require insurers to take stronger steps to prevent STATs.

According to Russel Dorsett, President of LISA, insurance companies should be doing more to prevent the occurrence of STAT arrangements. "As the new national consensus emphasizes, Life insurers are responsible for the actions of appointed agents who originate annuities, and they need to change their business practices in order to eliminate this problem," said Dorsett. "Every company should prohibit its appointed agents from promoting and end the sale of annuities in instances where the annuitant is terminally ill or where the contract's benefits are pre-arranged to be owned by a party that has no insurable interest in the annuitant," continued Dorsett.

LISA has a strong interest in this discussion, Head explained, "Despite the efforts by some in the life insurance industry to liken these types of transactions to life settlement or secondary market transactions, STATs are unrelated to and have no connection with life settlements or the secondary market. STATs are a limited opportunity for exploitation borne by the death benefit features of variable annuity contracts and advanced by the improper conduct of unscrupulous appointed agents. Stranger-originated annuities transactions, like stranger-originated life insurance, occur at the time of application of the life insurance policy. As such, efforts to successfully combat STATs can be achieved with attention and scrutiny on the solicitation, application and issuance of these annuity contracts. Interfering with the lawful sale or assignment of annuities and life insurance consumer's is not a solution to STATs, or STOLI, and will be vigorously opposed."

LISA and other life settlement companies have asked to testify at the NAIC's hearing on STATs being held on May 20, 2010 in Washington, DC.


Doug Head
LISA Executive Director
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