The friction between investors looking for opportunities and insurance companies whose products inadvertently provide those opportunities is forcing a hard look at stranger-originated annuity transactions (STATs), according to an industry expert.

David Kleinhandler

“People are always looking for these types of anomalies in policies,” said David Kleinhandler, managing partner of New York-based DKA, a financial planning company for high net-worth individuals and businesses selling life insurance and annuities. The people selling STATs “will look for insurance companies that have products with holes in them,” he said.

Describing STATs as “ghoulish,” Kleinhandler said the economy has played a role in the practice where investors target seniors and terminally ill people to buy annuities for their benefit.

STATs appeal as a “hit and run business” for investors, including private equity firms, on which they can earn better returns – often more than 15% – than with other financial instruments, according to Kleinhandler.

The National Association of Insurance Commissioners scheduled a public hearing for May 20 in Washington, D.C., to investigate the “the suspect practice of targeting seniors and terminally ill patients by inducing them to purchase an annuity largely for the benefit of investors or intermediaries,” according to an NAIC statement.

Over six hours, representatives from many facets of the life insurance and annuities industry are expected to testify before the NAIC’s Life Insurance and Annuities Committee at the Washington Court Hotel, starting at 11 a.m.

Industry weighs in on STATs

The National Association of Insurance and Financial Advisors (NAIFA) opposes STATs. “Much like with a STOLI transaction, it appears that a STAT is usually not being initiated for a typical or historically legitimate insurance purpose,” said Thomas D. Currey in a statement.

The Life Insurance Settlement Association (LISA) also opposes STATs, calling them “schemes in which strangers solicit and finance the purchase of certain variable annuities using individuals of very poor health as ‘straw man’ applicants.”

In naming the hearing, “Is the STOLI Market Moving to Annuities and How Should We Protect Consumers?,” the NAIC appears to liken STATs to stranger-originated life insurance settlements, or STOLIs, which have been banned in 29 states. In those transactions, investors provide an incentive or fee to a terminally ill or elderly person to buy a life insurance policy, from which the investors will receive death benefits when the original buyer dies. The NAIC and critics of STOLIs say they prey on senior citizens and terminally ill people.

The NAIC hearing on STATs is expected to examine whether the transactions are lawful, how they affect insurable interests, if existing model laws and regulations afford consumers enough protection, and, if not, what new models or regulations should be developed or tightened, according to the NAIC.

NAIC hearing’s focus

Thomas R. Sullivan, head of the NAIC committee holding the hearing and Connecticut’s insurance commissioner, told IFAwebnews.com that the hearing was scheduled after he received questions about STATs from other insurance commissioners.

Among the speakers scheduled to participate in the NAIC hearing are Lawrence Kosciulek, director of the Financial Industry Regulatory Authority (FINRA) investment company regulation department; Lee Covington, senior vice president and general counsel of the Insured Retirement Institute; Kelly Ireland and Michael Lovendusky of the American Council of Life Insurers; Jacob Hershler of Prudential Financial; and Gary Sanders of NAIFA.

The life settlement industry will be represented at the hearing by LISA’s executive director, Doug Head; Michael Freedman, vice president of government affairs for Coventry, a Pennsylvania-based life settlement firm; Brian K. Staples, president of Right LLC; and Kathleen A. Birrane, general counsel of Maple Leaf Financial.

Insurance companies bear some of the blame for the growth of STATs because they have not created new products that “benefit the insured enough,” Kleinhandler said.

“They [insurance companies] need to get out of the ice age and find a way to compete with better products,” he said.