OIR Informational Hearing on STOLIs Report: August 28

On August 28, 2008, the Florida Office of Insurance Regulation (“OIR”) held a public hearing on various arrangements referred to as Stranger-Owned Life Insurance, Stranger-Oriented Life Insurance, Stranger-Originated Life Insurance and Speculation-Initiated Life Insurance commonly referred to as “STOLIs.” To view a copy of the agenda, click here.

Florida Insurance Commissioner Kevin McCarty presided over the hearing. Other OIR officials present included Mary Beth Senkewicz, Bernie Stoffel, and Susan Dawson.

Commissioner McCarty opened the hearing and noted that it is being held primarily to collect information and not for the purpose of suggesting proposed legislation. He added that some states have adopted the National Association of Insurance Commissioners’ (“NAIC”), National Conference of Insurance Legislators’ (“NCOIL”), or similar versions of model laws relating to STOLIs.

The hearing included testimony from many interested parties representing the life insurance industry.

A representative of the Probate and Trust Law Section of the Florida Bar, provided an overview of Florida’s Insurable Interest Law and reviewed Senate Bill 648 (“SB 648”), which was passed during the 2008 Florida Legislative Session.

Responding to inquiries from the OIR panel, Mr. Gans testified that the objective of SB 648 was to be STOLI-neutral and to clarify Florida case law.

OIR staff briefly reviewed other statutes affecting insurable interests. Ms. Dawson noted those statutes related to Florida viatical settlement laws that apply to STOLIs (Section 627.409, F.S. relating to misrepresentations; Section 629.989, F.S. relating to reporting requirement for fraudulent activity; and Section 626 Part IX relating to unfair insurance trade practices).

Mr. Stoffel discussed Florida’s viatical statutes (Section 626 part X), and stated that the NAIC and NCOIL have taken steps to remove STOLI-type transactions.

Michael Myers, a consumer representative, testified that Florida’s new law (SB 648) is commensurate with the laws of other states that recognize a consumer’s right to buy life insurance on his or her own life, freely transfer that interest, and assign a contract for compensation.

However, he noted that the secondary life insurance market poses consumer protection concerns, such as a lack of informed consent.

Life Insurer Representatives

Life insurance representatives testified that there is a legitimate market for individuals that may need STOLI-type products. However, the potential for fraud and abuse outweigh these products’ limited uses. Additional concerns cited with STOLIs were that they “create their own market,” and that ultimately, standard life insurers will see negative effects through increased costs.

Life insurers insisted that their product should not be treated like a commodity, and that investors and speculators are driving the STOLI market. They noted that while there are legitimate transactions, the problem is how to identify the intent of the transaction. Intent is difficult to regulate, and because of the existent schemes and fraudulent activity, STOLI products can be harmful.

Commissioner McCarty noted that the life insurance market itself is becoming less than ideal.

Industry Constituent Representatives

Viatical and STOLI representatives testified that their product is necessary in the market and provides a benefit to many individuals. These representatives supported the NCOIL model law and indicated that the NAIC’s model law is overly broad in scope.

Commissioner McCarty acknowledged the unanimous consent for the existence of a legitimate purpose for STOLIs, inasmuch as the secondary markets can give life insurers certain value they were not otherwise receiving. However, stranger-originated or “manufactured insurance” is viewed as the problem.

It was agreed that no law should prohibit the sale of a life insurance policy or any legitimate premium finance product.

Agent and Broker Representatives

Testifying in support of the NAIC Model, agent and broker representatives noted that, given the right intent, STOLIs can be transacted for legitimate purposes, but often, the illegitimate uses transform them into bad products.

One agent noted that human life should not become a commodity, which is often the case with STOLIs. According to another agent, STOLIs are generally sold as free insurance in the practicing world.

Commissioner McCarty stated that he would like to continue the dialogue among the interested parties on this matter.

Ms. Senkewicz concluded the hearing and noted that the record will remain open until September 28, 2008 for anyone wishing to submit written comments.

Written comments should be forwarded to Mr. Stoffel at Bernie.Stoffel@floir.com, subject line “STOLI Hearing.”

Should you have any questions regarding this matter, please do not hesitate to contact Colodny Fass.