Carrier Encroachment and How It’s Impacting the Life Settlement Industry

A life insurance policy with US currency sitting on top of it

Recently, the National Council of Insurance Legislators (NCOIL) issued a resolution regarding the current problem of carrier encroachment. As a business which provides life expectancy assessments and life underwriting services to the life settlements industry, ISC Services speaks to the impact of this carrier encroachment issue on the industry, if it’s not resolved.

What is Carrier Encroachment?

Carrier encroachment is the term used to describe a life insurance company entering into a life settlement transaction with their customer without complying with the life settlement regulations that are in place in 43 different states. This includes life insurance carriers offering an enhanced cash value (ECV) offer without the proper licenses to buy back life insurance policies from their customers. Those in the life settlements industry must hold a life settlement provider license to legally conduct these transactions.

Violating the Standard Nonforfeiture Law for Life Insurance

The main problem with carrier encroachment is the violation of the Standard Nonforfeiture Law for Life Insurance, which is in place in a majority of states. By offering the consumer an ECV and attempting to buy back the risk of an outstanding policy, carriers have violated the Standard Nonforfeiture Law, but they’re also encroaching on the life settlement business.

All life insurance policies have standard provisions and non-standard provisions.. The basic difference is that, in a given state all life insurance policies issued in that state are required to include the standard provisions written into the law. Optional provisions are permissible but not required to be a part of all policy contracts.Since, life insurance policy are legal contracts, these provisions cannot be changed within a product or a class of product without regulatory approval or the consumer’s consent.

Carriers are identifying a class of products that they would like to take off the market, for reasons like mispricing. Essentially, the insurance carriers are buying back life insurance policies they issued in the past, that have characteristics that make them attractive to the life settlement market. By making an ECV, a carrier can remove these policies from the market before a life settlement occurs — if they act quickly and the consumer is unaware of the life settlement option.

For example, when a carrier issues a policy to an insured, they don’t issue a policy to Person A that’s different from Person B within the same product line. Assuming Person A and Person B buy the same product the contract they receive will have the same provisions, generally speaking. More importantly, the basic pricing structure of that product will be the same.  If Person A is impaired and gets a higher rating, their premiums may be higher than B’s, but the basic provisions and pricing structure of the policy would be the same. If a carrier decides it wants to take all of that product’s policies off the market, they may launch an ECV marketing effort to induce consumers to surrender their policies early. 

The ECV offer, which is more than the surrender value built into the contract, is presented to the consumer to buy the risk of that company’s product back, before claims occur. Carriers that have figured out that either the policy is the subject of a life settlement and they’re competing indirectly with the life settlement market, or that they’ve mispriced the product may attempt to make an ECV offer to the policy holder. Their concern is that an informed consumer will choose to either keep  the policy, or sell it in a legitimate life settlement, both of which will ultimately expose the carrier to a claim somewhere down the road. Claims against mispriced products can expose the carrier to losses, thus ECVs are an attempt to buy back potential claims.

It’s not that life insurance carriers can’t participate in the life settlement marketplace, but to do so they must comply with the same laws and regulations all life settlement companies are bound by. A big part of that compliance is the provision of disclosures to consumers and adherence to the same rules that apply to life settlement companies.

A Threat to the Life Settlement Industry

NCOIL’s recently issued resolution states that the enhanced cash value offers are not valid and should not be permitted, which is a big win for the life settlement industry. Both NCOIL and the National Association of Insurance Commissioners (NAIC), provide expertise, data, and analysis for insurance legislators and commissioners to effectively regulate the life insurance industry and protect consumers, write model acts and propose model language for laws which can then be adopted by the individual states.

Because NCOIL sees encroachment as a concern for consumers and the life settlement industry, issued this resolution to prompt the states to look at the language in resolution and decide whether to adopt a prohibition against ECV offers (i.e., encroachment).

ISC Services and Carrier Encroachment

It’s pretty straightforward: ISC Services sells life expectancy assessments to the life settlement industry and underwriting services generally.If the life settlements industry faces a threat, we are indirectly threatened as a provider of these services. If our clients are being unfairly threatened by non-compliant conduct from the life insurance industry,which is much larger and more powerful than the life settlement business, we cannot sit idly by and watch as anti-consumer and anti-competitive forces undermine one or our key markets.

Life insurance carriers attempting to encroach on the life settlement business, are using what ISC Chief Development Officer Chris Conway calls, “the blunt instrument approach.” As Conway explained, “It’s to say, go to the customer. Make him an offer, tell him how great it is. Don’t tell him it might not be the best offer. Don’t tell him there might be competing offers, just get it high enough to get them to act and you can take that policy off the market.”

If insurance carriers were competing on a level playing field, they would need to know what ISC Services’ life expectancies are and what those of our competitors are, so that they know what the competitive market value of the policy is. But if they’re buying the policy back in-house, and they’re just buying back their risk, they don’t care as much, because they’re not going to own the policy or the risk, once it’s off the market. Instead, the policy is effectively  gone, as is the carrier’s risk of claim. To do this, carriers just need to disconnect the consumer from the policy, so they don’t have the risk of a claim in the future.

How Life Settlement Professionals Can Make a Positive Impact 

The Life Insurance Settlement Association (LISA) has spoken to regulators in several states, and some of the carriers involved in this activity have been fined in the markets where they’ve tested the ECV approach.

Some of the forms and documents that the carriers used were approved by the states for use, which indicates that the states didn’t understand the perspective associated with life settlements and this activity. However, once they were educated by LISA and understood the implications, these states took action.

ECV offer are a mechanism by which carriers could eliminate competition for the competitive pricing of their unwanted or unneeded assets to the detriment of consumers and to the industry that competes in an open marketplace to buy them. The life settlement industry is keeping an eye on these kinds of things and will continue to do so.

NCOIL’s statement and resolution has put the life insurance industry on notice that state legislators have an issue with ECV activities. We don’t yet know how they’re going to react to the resolution or what, if any, laws may be proposed or enacted to bolster the consumer protections the resolution seeks to preserve. Due to the nature of this issue, professionals in the life settlement industry need to be vigilant about these kinds of activities in their market going forward.