Call for Ban on Life Settlement ABS Draws Opposition

The American Council of Life Insurers' (ACLI) call for a ban on life settlement securitizations has been met by some opposition that believes closing this segment of the market could hurt consumers.

On Feb.3, the ACLI released a statement asking policymakers to ban the securitization of life insurance policies sold in the secondary market. 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.

“The recent policy statement issued by ACLI concerning securitization of life settlements is misplaced and incorrect,” said Jack Kelly of the Institutional Life Markets Association (ILMA) said in a statement. “ACLI in the past has repeatedly acknowledged the validity of life settlements and in its recent statement fails to distinguish between valid life settlements and the illegal origination of life insurance policies, also known as STOLI. Since ILMA’s inception, it has aggressively opposed STOLI transactions and has supported legislation in all 28 states that have made such transactions illegal.”

In a published critique of the ACLI proposal, the Insurance Studies Institutes also sought to clarify the distinction between settlements and STOLI. “The life insurance secondary market industry is in agreement that STOLI transactions are illegal and should not be condoned,” said the note. “Many states have enacted legislation to better define and prohibit STOLI transactions.”

The note published by the Insurance Studies Institute said that if policymakers follow the ACLI’s lead it could destroy “a vibrant secondary market for life insurance, thereby denying seniors the option and right to realize full market value for their unwanted, unneeded and unaffordable life insurance policies.”

Rather than curtail seniors’ options, the key, according to the study, should be in educating and informing consumers of their options with respect to the ownership of life insurance.

The note argued that securitization by a life insurer of expected future profits of a closed block of business are the same tools and techniques being made available for the consumers’ benefit. An outright ban would prohibit individuals to realize full market value for their unwanted, unneeded and unaffordable policies.