N.Y. life settlement bill unlikely until ‘09

Revised NCOIL-based legislation will be brought up in next session

New York, one of just 10 states where life settlements are unregulated, is unlikely to see a law governing the business until January, when legislators reconvene for their next full session. In June, state lawmakers adjourned without passing legislation that closely followed a model act drafted by the Washington-based National Conference of Insurance Legislators. An earlier bill, proposed by the state’s insurance department and containing a controversial requirement that investors in life settlements register with the department, had been scrapped.

“There were a number of objections raised by interested parties, so in the interest of getting a law on the books, we pursued the NCOIL model, which has been adopted in a number of other states,” said Kristina Baldwin, counsel to the Senate Insurance Committee.

“Outside of the department, I don’t think anybody thought the registration requirement was a good idea,” said Doug Head, the executive director of the Life Insurance Settlement Association of Orlando, Fla.

In the original bill, the registration requirement would have given the state the ability to “know who owns the policy, and if need be, contact them if there’s an issue,” said Kermitt J. Brooks, a first deputy insurance superintendent who heads the life insurance bureau of New York’s Insurance Department.

He said that the requirement wouldn’t have applied to investors in securitized pools, as those pools don’t have access to the identities of the insureds.

The main thrust of both the original and revised bills is to ban “stranger-originated life insurance.” In a Stoli transaction, a third party solicits people to take out life insurance policies in order to buy the policies for investment purposes.

Stoli transactions violate insurable interest laws, which mandate that the person initiating a life insurance policy on another has a relationship with the insured — such as being the insured’s spouse or business partner — that would result in a financial loss in the event of the insured’s death.

Life settlement involves the sale of an in-force life insurance policy by the policy owner to a third party for more than the policy’s surrender value. The purchaser becomes the beneficiary of the policy and pays the premiums.

The prospective new law in New York follows the NCOIL model in that it would “define, prohibit, and punish inappropriate Stoli activity,” Mr. Head said.

About 40 states have passed laws on life settlements, with 12 enacting Stoli legislation this year, said Mike Humphreys, director of state-federal relations at NCOIL.

Of those 12, seven “enacted legislation that closely tracks the NCOIL proposal and an additional three states approved legislation that includes sections of the NCOIL and NAIC drafts,” he said, referring to another model act drafted by the National Association of Insurance Commissioners, based in Kansas City, Mo.

Mr. Head maintained that a New York registration requirement would have reduced liquidity in the market for life settlements.

“Now, things can move pretty fast in January,” he said, adding that interested parties are close to a bill that everybody can support.