In the United States life insurance market, a standard, non-forfeiture law exists, adopted in every state based on a model from the National Association for Insurance Commissioners (NAIC), which stipulates that should a cash value life policy lapse, the policy holder will not forfeit the policy value because of missed premium payments. It’s a consumer protection clause, designed to ensure that Americans don’t miss out on the cash surrender value of the policy due to being unable to pay the premiums for a couple of months (or just forgetting to do it).
A certain part of the law was the subject of a recent resolution passed by the USA’s National Council of Insurance Legislators (NCOIL) at its summer national meeting in June this year. Specifically, NCOIL felt that certain life insurance companies were violating the standard non forfeiture law’s ‘smoothness requirement’, which was added in 1980, and prohibits sharp, temporary increases in cash surrender value offers; ergo, NCOIL felt that these ‘enhanced cash surrender value offers’ (ECSVOs), from life insurance companies were illegal.
“The legislators believe that these new enhanced cash surrender offers don’t comply with the standard non-forfeiture law,” said NCOIL CEO Tom Considine. “We think these offers violate that law and regulators shouldn’t be approving any endorsements that take that approach because they are in violation of the law.”
Industry says that the issue at hand is one of fairness. The smoothness requirement of the standard non-forfeiture law is designed to ensure that a consumer doesn’t miss out on a potential windfall by selling their policy before they might receive a higher offer, or that they don’t have the time to make an informed decision before the offer expires. Nat Shapo, a Partner at law firm Katten Muchin Rosenman, who represented the Life Insurance Settlement Association at the NCOIL summer meeting, says that the ECSVOs from life insurance companies didn’t come close to adhering to the letter of the law.
“It would be hard to intentionally design a product less compliant, or with a less smooth progression of cash surrender values,” he said.
The NCOIL resolution is not a law; the individual states make their laws. Often, changing legislation can take months, if not years, with millions of dollars spent by both sides of the debate trying to get the lawmakers to see their point of view. This situation is not that, however; the law exists, so the next step is getting the state insurance departments to simply tell life insurance companies to stop issuing ECSVOs and withdraw the ones that have been made.
“Withdrawing an approval generally follows the same standard as denying an approval in the first place: if the form violates the insurance code, its use is prohibited. What NCOIL has called for can be done at any time in any state,” said Shapo.
Regardless of how quickly state regulators withdraw the approvals for ESCVOs, the life settlement industry is a particular beneficiary. In life settlements, the sale process from policy owner to investor is heavily intermediated, where policy owners go through brokers, and investors go through providers. Other firms providing services such as life expectancy modelling, legal services, and tax and accounting services, contribute to the overall ecosystem. The process exists to ensure that the broker or insurance agent representing the policy owner, and the investor who purchases the life settlement, are adhering to their fiduciary duty to their clients. Trade body the Life Insurance Settlement Association lobbied NCOIL to take action regarding ECSVOs and is naturally pleased at the outcome.
“The Life Insurance Settlement Association (LISA) and its members applaud NCOIL’s recent resolution which identified certain ECSV endorsements as illegal and in violation of standard nonforfeiture law,” said John Welcom, the CEO of Welcome Funds and LISA’s Chair. “NCOIL’s leadership on this issue will ensure that in-force consumer protections are conveyed to policy holders.”
Life insurance companies have only been offering ESCVOs since around 2018, and even then, only a few companies have made these offers to policyholders. The policies that have been the recipient of an ECSVO are those that would typically qualify for a life settlement transaction – higher maturity value universal life policies. But whilst the life settlement industry does benefit from the ruling, it argues that the consumer does, too.
“In life settlements, the policy owner has recission rights, which usually lasts for a minimum of 15 days, which enables them to remedy seller’s remorse. Brokers have a fiduciary duty to get the best price for their clients, and doctors are required to provide a certificate of competence, declaring the policy seller competent enough to enter into the transaction,” said Shapo.
But one argument goes the other way. Assuming the states do follow NCOIL’s resolution and withdraw approvals for ECSVOs, isn’t that both anti-competitive and bad news for the consumer? Surely, for the American consumer, isn’t the opportunity to realise a higher sale price for their life insurance policy a positive?
According to Considine, it’s not that clear cut.
“It’s necessary for all consumers who have the same type of policy to be treated equally. If you and I have the same policy and you get a letter saying for the next 3 weeks, you can take advantage of this enhanced cash surrender deal, but I don’t, that’s not fair. It’s the job of legislators in state insurance departments to protect fairness for everyone,” he said.
The life insurance industry isn’t giving up. A spokesperson for the American Council of Life Insurers, Whit Coleman, said in an emailed statement to Life Risk News:
“During the March 2022 NCOIL meeting, Oklahoma Insurance Commissioner Glen Mulready suggested that a request be sent to the NAIC Life Actuarial Task Force to revisit this issue and determine if clarifications are necessary. We believe that is the appropriate place to continue discussion of this issue, and we hope it will result in a clear path forward.”
Still, NCOIL expects swift action.
“NCOIL would hope and expect that regulatory approvals would come to an almost immediate end. We also think that the industry is well on notice of this, that insurance companies will be far more hesitant about filing these things. By NCOIL taking this action, we’re saying that regulators shouldn’t approve this and if need be, we’ll tighten the legislation around this,” said Considine.