The chairman of a National Association of Insurance Commissioners (NAIC) committee compared stranger-originated annuity transactions (STATs) to cockroaches, while others suggested the need for tighter regulation of the growing practice.

Thomas R. Sullivan

Thomas R. Sullivan, chairman of the NAIC’s life insurance and annuities committee and Connecticut insurance commissioner, offered the statement during a day-long hearing in Washington, D.C., investigating whether STATs are legal or might need additional consumer protection.

“These scams are like cockroaches. For every one you see, there are most likely hundreds in hiding,” Sullivan said. “Unfortunately, there is no way of knowing the full magnitude of this problem, but regulators are taking a diligent look at the conditions surrounding these sales and practices.”

Testimony focused on 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 on the meeting.

Two industry groups, the National Association of Insurance and Financial Advisors (NAIFA) and the Insured Retirement Institute (IRI), called for greater regulation of STATs.

“It is NAIFA’s belief that STATs are contrary to established public policy and could potentially undermine the intended use of life insurance and annuity products to the great detriment of the insurance industry and American public, which relies on our products for protection and financial security,” said Gary Sanders, NAIFA’s vice president for securities and state government regulation, in prepared comments.

He called STATs “troublesome,” comparing them to stranger-owned life insurance transactions (STOLI), which 29 states have banned. In both STOLIs and STATs, investors get seniors or terminally ill people to obtain policies, for which they are paid a fee, but the investors eventually obtain the death benefit.

The IRI in its prepared comments said STATs are unlawful. “At the very least, these transactions allegedly involve fraud and material misrepresentations,” said Lee Covington, senior vice president and general counsel for the group.

The hearing, which Sullivan convened after receiving questions about STATs from other insurance commissioners, included testimony from various industry groups, including trade organizations, life settlement firms and associations, and alleged victims.

Robert Mizzoni, 83, of Cranston, R.I., told regulators how he and his wife were victims of an annuity scam, and federal prosecutors are investigating a Rhode Island attorney who placed ads in church newspapers offering immediate cash to individuals with terminal illness. The attorney’s goal was to take advantage of the death benefit built into many variable annuities, according to the NAIC.

Adam Hamm, vice chairman of the committee and North Dakota insurance commissioner, said in a statement that “further safeguards are needed to protect consumers from unscrupulous practices.”