by John Darer CLU ChFC CSSC RSP CLTC
In this blog I continue to make the case for why there should be greater regulation of the structured settlement purchasing industry (a/k/a "structured settlement secondary market") and to question the regulatory asymmetry with the structured settlement primary market, which creates a Wild West of deplorable sales practices that are harmful to American consumers and investors. Before we explore that question, let's explore why the sale of annuities (including structured settlement annuities) and other insurance and financial products is regulated.
Why Are Insurance and Annuity Sales Regulated?
The fundamental reason for government regulation of insurance is to protect American consumers. State systems are accessible and accountable to the public and sensitive to local social and economic conditions. State regulation has (generally) proved that it effectively protects consumers and ensures that promises made by insurers are kept. Insurance regulation is structured around several key functions, including company licensing, producer licensing, product regulation, market conduct, financial regulation and consumer services. { Source: National Association of Insurance Commissioners-NAIC]
Insurance agents and brokers, also known as producers, must be licensed
to sell insurance and must comply with various state laws and regulations governing their
activities. Currently, more than 3.2 million individuals are licensed to provide insurance services
in the United States. State insurance departments oversee producer activities in order to protect
insurance consumer interests in insurance transactions. [ Ibid.]
The states administer continuing education programs to ensure that agents meet high professional
standards. Producers who fail to comply with regulatory requirements are subject to fines and
license suspension or revocation. In 2000, nearly 16,000 insurance producers had their licenses
suspended or revoked. [ Ibid.]
When producers operate in multiple jurisdictions, states must coordinate their efforts to track
producers and prevent violations. Special databases are maintained by the NAIC to assist the
states in this effort. The National Insurance Producer Registry (NIPR)—a non-profit affiliate of
the NAIC—was established to develop and operate a national repository for producer licensing
information [Ibid.]
Forum Shopping not as prevalent when placing life insurance, annuities, etc.
If you are selling an insurance product to someone it generally must be in their state of residence or their work address, or the state that is the location of one of their other homes (if applicable). Back in my Northwestern Mutual days, NML would come out with a new disabilty insurance product that had to be approved on a state by state basis. Invariably New York was one of the last states to approve, so in some cases where New York had yet to approve a new policy series, we could only sell to someone who worked in New York if they resided outside the state (e.g. CT, NJ).
Structured Settlement Annuitants are Heavily Solicited and Encouraged to Commit Fraud Aided and Abetted by Certain Settlement Purchasers as Part of the Sales Process
With a modicum of research I have seen a number of instances where people have been encouraged to commit fraud by creating an "at a glance" impression that they reside or are domiciled in Florida (i.e forum shopping). One of the most laughable attempts I have been made aware of was from to the Sumter County Florida court (above) in September 2013. A competing settlement purchaser scraped the court records and mailed a postcard to the annuitant at the Florida address listed in the Sumter submission just a few days after the submission. That postcard was returned with a yellow postage sticker "forwarding order expired" bearing a New York address. Following through on the information our sourcs were able to come up with numerous ties to New York state and very few to Florida that could not be "manufactured"in a day or two. Upon information and belief settlement purchasers are initiating the idea, even weighing the potential consequences with the annuitant if they are caught. One NC resident I spoke to was encouraged to use the address of his grandmother who he had not seen since age 5.
Investors are being solicited to buy structured settlement payment rights mislabeling them annuities to get branding juice with retirees and others seeking stable income. Some companies have made unathorized use of the trademarked logos of the life insurance companies to enhance the deception. Some have even suggested that these products enjoy statutory protection that state laws prohibits licensed insurace agents and brokers from advertising.
Why shouldn't the structured settlement factoring industry be regulated just like life settlements?
Why shouldn't the structured settlement factoring industry be regulated just like life settlements, a parallel dimension to the structured settlement secondary market that operates under the purview of state insurance regulators? For example Illinois life settlement laws include enforceablestandards for advertising of life settlement and viatical businesses. [ see Illinois Viatical Settlements Act of 2009]
Transparency and accountability, how about it?
Some settlement purchasers feel that there is alot of regulation. One opined that requiring licensing fees would seriously impact some players and lead to an industry consolidation that would harm consumers due to less competition. As someone who pays licensing fees and files annual reports, that's the price of admission. Is there any lack of competition with life insurance agents. According to NAIC there are more than 3.2 million of them in the United States.
There needs to be regulatory symmetry. Which entity regulates is up for debate, but something needs to happen. The recent entry of Midland States Bank into the space, shows that there is an opportunity for regulated entities to operate in the space. No doubt there will be others.
To be continued.