The American Council of Life Insurers (ACLI) recommended that life settlement securitizations be prohibited by legislation or regulation.
ACLI said that securitization of life insurance settlements exposes senior citizens and investors to increased risk of fraud related to the illegal stranger-originated life insurance (STOLI) transactions, the statement said.
In STOLI transactions, investors or middlemen approach seniors and encourage them to purchase life insurance policies they otherwise would not buy solely to sell the policies to investors.
STOLI transactions have been outlawed in 28 states and most other states are considering anti-STOLI legislation. Seniors caught up in STOLI schemes face potential legal and tax liability.
Because only a limited number of insured individuals are candidates for life settlements, securitization promoters will have to build their inventories through STOLI, said ACLI.
ACLI said that securitization exposes investors to significant risks. “First, securitization packages will inevitably become contaminated with STOLI,” ACLI said. “Second, securitization promoters have no incentive to properly underwrite the package. Rating agency experts say there is no standard method and no standard set of assumptions used by life settlement providers to predict life expectancies. Without proper underwriting, life settlement securitizations are likely to fail economically.”
Late last year the securitization market began turning its attention to the potential in life settlements. Some experts predicted the market to be as large as $20 billion with the potential to grow to $500 billion in the months ahead.
The risks associated with life settlement securitizations are under scrutiny by the Securities and Exchange Commission, Massachusetts’ officials and Congress.