Life Settlements in U.S. May Have High Fees, Lack Transparency, GAO Says
Senator Herb Kohl of Wisconsin, chairman of the Senate Special Committee on Aging. Photographer: Chris Kleponis/Bloomberg
Cashing out life-insurance policies may be risky for sellers and buyers because of inconsistent regulation, according to the Government Accountability Office.
Senior citizens may be charged excessive fees and get less than they should when selling their policies in transactions known as life settlements, the GAO said in a report today. Investors who buy the policies may not receive enough information about the risks.
“The differences in regulations from state-to-state afford some consumers less protection when engaging in a life- settlement transaction simply because of where they live,” said Senator Herb Kohl, a Wisconsin Democrat, who’s chairman of the Senate Special Committee on Aging, which requested the report.
In life settlements, policies are sold to investors, who pay the premiums until the sellers die and then collect the proceeds. Senior citizens may sell their policies because they need cash, the premiums are too expensive or their beneficiaries have passed away.
The average face value of a sample of 1,020 policies sold in a life settlement in 2008 was almost $2.3 million, the GAO said, citing Life Policy Dynamics LLC, a Washington-based consultant. The annual premium on average for a policy worth about $2 million was $98,440 and a policyholder in 2009 received $263,818 for selling, compared with $36,700 for surrendering it to the insurer, according to Life Policy Dynamics.
Life-settlement providers surveyed by the GAO reported purchasing policies with a total face value of $7.01 billion in 2009 compared with $12.95 billion in 2008 as the credit crunch decreased demand, the agency said.
‘Informal Network’
The industry is currently organized as “an informal network of intermediaries,” the report said. Life-settlement brokers collect commissions for representing policyholders looking to sell and settlement providers usually get fees for buying policies that may be pooled on behalf of investors including individuals, banks, insurance companies and hedge funds.
There may be a lack of consistent oversight since state insurance regulators focus on protecting policy owners and state securities regulators are generally responsible for protecting investors, the GAO said. Policyholders in some states could complete a life settlement without knowing how much they paid in fees or whether they received a fair price, unless the information was provided by brokers voluntarily, said the agency.
Risks for investors include longevity because the original policyholders may live longer than expected, legal challenges if the insurer contests the policy and lack of liquidity, the GAO report said.
SEC Report
The Securities and Exchange Commission released a separate report today about investor protection in the life-settlement market. Life settlements should be clearly defined as securities so investors in these transactions are protected under U.S. securities laws, the SEC’s report said.
“The life settlements market calls out for enhanced and coordinated regulatory oversight to protect the emerging class of investors interested in this market,” Mary Schapiro, chairman of the SEC, said in a statement. She formed a task force last summer to scrutinize instances when financial institutions package the policies into bonds and sell them to investors.
Federal Oversight
Twelve states and the District of Columbia don’t have insurance laws specifically regulating life settlements, according to the GAO. Across the 38 states that did have insurance laws overseeing the industry as of February 2010, regulation varied, the report said.
Twenty-four out of 34 state regulators that had the authority to examine brokers who negotiate sales of policies hadn’t done so in the past five years and 22 out of 33 state regulators authorized to regulate providers who negotiate the purchase of policies also hadn’t examined them, the agency found.
“Life settlements offer another example of products that may lack clear, comprehensive regulation,” and oversight is needed to provide a consistent minimum level of protection for policy owners and consistent financial regulation for investors, the report said. The financial regulation bill signed by President Barack Obama yesterday creates a Federal Insurance Office within the Treasury Department, which will serve as a national watchdog.
GAO Mission
State laws regulating life settlements are consistent in their focus on policyholder protection and a federal charter isn’t appropriate for regulation of the market, the National Association of Insurance Commissioners, which is the organization of state insurance regulators, said in a letter responding to the GAO report.
The GAO, a Congressional agency whose mission is to improve the performance and accountability of the federal government, conducted the audit from August 2009 to July 2010. The GAO based its findings in part on completed surveys from 25 life- settlement providers licensed in two or more states and 45 state insurance regulators.
To contact the reporter on this story: Alexis Leondis in New York aleondis@bloomberg.net.
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