BILL ANALYSIS
SB 1242
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Date of Hearing: June 23, 2010
ASSEMBLY COMMITTEE ON INSURANCE
Jose Solorio, Chair
SB 1242 (Calderon) - As Amended: June 14, 2010
SENATE VOTE : Not relevant
SUBJECT : Life insurance policy settlements
SUMMARY : Provides several clean-up provisions to the recently
enacted life settlement regulatory law. Specifically, this
bill :
1)Provides that the information required by the Insurance
Commissioner (IC) to be filed by an applicant for a life
settlement license shall be confidential, and that the
information specified in the statute is the only information
that the IC may require of the applicant.
2)Specifies that the 14 detailed elements of the statutory
disclosure to be provided at the time of an application to
purchase a life settlement contract are the only
pre-application disclosures that can be required.
3)Provides that the statutory disclosures required of a life
settlement broker to the owner of the policy are limited to
those specified in statute, and eliminates the requirement to
disclose life expectancy information to the owner.
4)Clarifies the scope of the IC's authority to adopt regulations
by specifying that he or she may adopt any regulations
reasonably necessary to "implement and enforce the express
provisions of this act."
5)Provides that the detailed listing of information contained in
the statute is the only information that may be required to be
filed with the IC in a life settlement provider's annual
statement.
6)Clarifies that the life settlement act does not confer on the
IC any authority to enforce state securities laws, or to
regulate the assignment or transfer of a policy already
lawfully settled under the law.
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7)Contains legislative findings that ensuring the
confidentiality of pre-licensing information required by the
IC to be filed by an applicant furthers the purpose of
protecting consumers by achieving a full and thorough
disclosure of sensitive information to the IC.
EXISTING LAW :
1)Establishes a comprehensive regulatory program to govern the
"life settlement" industry.
2)Defines a life settlement contract as a contract providing for
the sale of a life insurance policy from the owner of that
policy to a third-party purchaser for value, subject to
specified exceptions and qualifications.
3)Requires that a life settlement provider (the party purchasing
the life insurance policy) and a life settlement broker (a
person who arranges the sale of the life insurance policy) be
licensed by the IC.
4)Requires an applicant for a license as a life settlement
provider to provide to the IC a substantial list of detailed
information, plus "any information the commissioner may
require."
5)Requires a life settlement licensee to provide to any
applicant to purchase a life insurance policy a comprehensive
14-item disclosure in at least 12-point type, including
mandatory statutory language about the personal information
that a buyer may require of a seller.
6)Requires a life settlement broker to disclose to a policy
owner information about the broker's business, the terms of
offers, counter offers and acceptances and rejections of
proposals to transact the policy, and the nature of any
affiliations or contractual arrangements between the broker
and any person making an offer in connection with a proposed
life settlement contract. The disclosure provision also
includes a requirement to disclose to the owner of a policy
any life expectancy information that may be acquired during
the process of completing a life settlement transaction.
7)Authorizes the IC to adopt regulations to "govern life
settlement transactions."
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FISCAL EFFECT : Undetermined.
COMMENTS :
1)Purpose . According to the author, the bill clarifies issues
associated with the comprehensive life settlement law that was
enacted last year (SB 98 (Calderon), Statutes 2009, Chapter
343), as well as responds to proposed regulations that the
Department of Insurance has drafted to implement the new law.
The author argues that portions of these proposed regulations
directly contradict the political compromises that were made
last year to achieve sufficient consensus to enact the
regulatory program.
2)Background . The life settlement industry is an outgrowth of
the viatical settlement industry, which has been regulated in
California for a number of years. A viatical settlement
involved the sale of a life insurance policy for a discounted
price by a person with a terminal disease (typically AIDS,
before treatments were developed), to allow the person to
enjoy the financial proceeds of a life insurance policy during
their final months of life. As AIDS became treatable, this
industry shifted towards cancer patients. In this evolution,
it became apparent that there are many people who are not
suffering from terminal conditions who could benefit from the
sale of a life insurance policy to a willing third-party
buyer. Because the viatical law was triggered by the
patient's medical condition, this latter type of transaction
was not subject to any regulatory law, and the term "life
settlement" developed to apply to life insurance policy sale
transactions by senior citizens who were otherwise healthy (or
at least not terminally ill.)
The owner of a life insurance policy has a property right in the
policy, and it is lawful for that owner to sell the policy.
While some life insurers were concerned with some of the
developments in this market, it was not until the development
of "stranger-originated life insurance (STOLI), as the life
insurers refer to certain transactions, that this industry
became subject to a political debate. In these so-called
"STOLI" transactions, a person is approached by a third party
to take out a life insurance policy for the purposes of
settling it, and the third party pays the premiums in exchange
for the right to buy the policy after a 2-year waiting period.
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In these cases, which can be arranged in numerous ways, the
policyholder is never truly intending to buy life insurance;
rather, they are seeking a financial recovery. In addition to
this problem, regulators reported various consumer concerns
with the life settlement industry, such as inadequate
disclosure, and problems with securities sold to finance
transactions.
A five-plus year process of carefully balanced negotiations
resulted in the enactment last year of SB 98. This year, the
IC is proposing regulations that appear to contradict at least
the spirit of the legislative agreement on SB 98, if not its
actual terms. SB 1242 is the consequence of those proposed
regulations.
3)Disclosure requirements . One of the most difficult aspects of
the SB 98 negotiations related to disclosure requirements.
Life insurers proposed language that agents and prospective
life settlement brokers believed disparaged life settlements.
They also believed some of the requirements would be
impossible to comply with, because the party required to make
a disclosure would not be in possession of the information at
issue. The end result was a lengthy, detailed recitation of
exactly what the various parties to a transaction are required
to disclose, and what parties are entitled to receive. The
Department's proposed regulations seek to expand these
carefully balanced disclosure requirements in a way that, had
it been in SB 98, passage would have been unlikely.
4)Delegation of Legislative authority . The law enacted last
year authorized the Insurance Commissioner to adopt
regulations "to govern life settlement transactions." This is
the basis for the IC's effort to expand the disclosure
requirements. Read liberally, this very broad grant of
regulatory could be interpreted to delegate to the IC the
authority to literally adopt any rule he or she thinks is
appropriate for any aspect of the life settlement industry.
It is doubtful that the Legislature intended to confer a
virtual delegation of legislative authority to the IC, and the
bill proposes to limit the authority to adopt regulations to
implement and enforce the provisions of the statute adopted by
SB 98.
5)Clarification of disclosure to owners . The bill deletes a
required disclosure to owners of policies that should not have
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been directed to policy owners. Specifically, current law
requires that policy owners be advised of life expectancy
analyses. However, that information is actually relevant as
an investment consideration for buyers, and buyers do not rely
on life expectancy information obtained from sellers (who
would have an interest in understating life expectancy), and
instead obtain their own analysis.
6)Enforcement of securities laws . The Department of
Corporations has jurisdiction over securities issues.
Securities issues involve either the method of obtaining
financing to purchase life insurance policies, or the
post-settlement packaging of lawfully settled policies for
sale into the secondary market. There was no intention in SB
98 to shift any authority over these issues to the IC.
However, earlier versions of the proposed regulations sought
to exercise authority over securities issues, and the bill
clarifies that the IC does not have this authority.
7)Individual transaction data . SB 98 specifically prohibits the
IC from requiring individual transaction data in the annual
statement. However, the proposed regulations attempt to
require this information, apparently in reliance on other
provisions of the new law. The bill, therefore, proposes to
repeal the language upon which the IC is attempting to obtain
data that was specifically proscribed.
8)Life insurer position . The Association of California Life and
Health Insurance Companies (ACLHIC) is reviewing the
provisions of the bill, and is committed to working with the
author in the event issues arise from its membership.
REGISTERED SUPPORT / OPPOSITION :
Support
Coventry First, LLC
Life Insurance Settlement Association (LISA)
Opposition
California Advocates for Nursing Home Reform (CANHR)
Department of Insurance (DOI)
Analysis Prepared by : Mark Rakich / INS. / (916) 319-2086
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