ACLI Securitization Stance Draws Fire

A position paper by the American Council of Life Insurers (ACLI) asking legislators to ban securitization of life settlements is eliciting some heated responses. The paper contends that securitization of life settlements presents dangers to the insured public and to the investors who buy the securities.

“Securitization may encourage promoters of these packages to prey upon senior citizens urging seniors to settle their life insurance policies even if a settlement is not in their economic best interests,” the ACLI paper states. “Insurers are also concerned about public policy implications of stranger-originated life insurance (STOLI), where promoters of life settlements induce seniors to buy life insurance policies that they would not otherwise purchase in anticipation of profit from the sale of the policy to investors at the end of the policy contestability period.”

Representatives of the settlements industry beg to differ and charge that the ACLI is conflating their industry with STOLI.

“The recent policy statement issued by ACLI concerning securitization of life settlements is misplaced and incorrect,” 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 Institute 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,” it reads. “Many states have enacted legislation to better define and prohibit STOLI transactions. But why ban investment products and the formation of capital for the life settlement option that is good for senior consumers? If purchasing a life insurance policy is good for a consumer, then why is selling a policy bad?”

The ACLI paper counters that securitization is inherently risky. “The only constituencies without risk on securitization will be the life settlement brokers and providers, security underwriters and middlemen lawyers, accountants and rating agencies who will enjoy fee income. Inevitably, life settlement-backed securities will be contaminated with STOLI policies, which will then be passed on to unsuspecting pension funds and other far-removed investors.”