Insurance regulators plan to tackle the thorny issue of insurable interest with regard to annuity sales, preparing the groundwork for changes that could discourage stranger-originated annuity transactions.
In a public hearing likely to be held in May in New York, the National Association of Insurance Commissioners will discuss the legitimacy of third-party annuity sales, in which an investor buys an annuity with death benefits on an unrelated person.
News reports about stranger-originated annuity transactions involving terminally ill annuitants — and regulators' concerns about such deals — have piqued the interest of the NAIC's life and annuities committee, said Thomas R. Sullivan, the insurance commissioner of Connecticut, who is chairman of the committee.
He would not say whether any state insurance regulators, who constitute the membership of the NAIC, are conducting investigations.
“When you undermine the principle of insurable interest, that's something we're concerned about,” Mr. Sullivan said. “What the hearing will probe is the broad principle: Are the transactions lawful? Do they undermine insurable interest? Is there enough from a consumer protection perspective on the books today in model laws and regulations? If there isn't, how should we tighten them?”
The applicability of state insurable interest law to annuity sales is central to the issue and has been raised in several federal civil suits filed by
Transamerica Life Insurance Co. and Western Reserve Life Assurance Company of Ohio. The insurers are suing an attorney, a group of broker-dealers and their reps for arranging stranger-originated annuity transactions.
Many carriers have begun to tighten their underwriting standards to forestall stranger-originated annuity transactions, said Steven B. Davis, partner at Stradley Ronon Stevens & Young LLP and co-chairman of the law firm's insurance practice group.
Moreover, statutes on insurable interest with regard to life insurance tend to be fairly stringent. A model law drafted by the National Conference of Insurance Legislators prohibits the settlement of insurance policies for two years, which fits with the two-year contestability period life carriers have to investigate and rescind claims on suspicious policies. A similar model law by the NAIC prohibits settlements for five years.
But states vary in the strictness with which they apply insurable interest to annuity sales. “There are states with stronger laws and consumer protections than others,” Mr. Sullivan said. “We'll do an analysis across the board to see who's got the best laws and the most pragmatic approach for allowing transactions that are in the customer's best interest but are also lawful.”
