The House Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises held a hearing yesterday entitled “Recent Innovations in Securitization” to discuss whether to establish stronger federal regulation with respect to life insurance securitization and life settlement plans generally. Testifying before the committee were the following witnesses:

  • Paula Dubberly, Associate Director, Division of Corporation Finance, U.S. Securities and Exchange Commission (SEC)
  • Susan E. Voss, Commissioner, Iowa Department of Insurance on behalf of the National Association of Insurance Commissioners
  • J. Russel Dorsett, Co-Managing Director of Veris Settlement Partners on behalf of the Life Insurance Settlement Association
  • Brian Pardo, Chief Executive Officer, Life Partners Holdings, Inc.
  • Jack Kelly, Director of Government Relations, Institutional Life Markets Association
  • Kurt Gearhart, Global Head of Regulatory and Execution Risk, Life Finance Group, Credit Suisse
  • Steven H. Strongin, Managing Director and Head of Global Investment Research, Goldman, Sachs & Co.
  • Daniel Curry, President, DBRS, Inc.

Subcommittee Chairman Rep. Paul E. Kanjorski (D-PA) and Ranking Member Rep. Scott Garrett (R-NJ) each provided introductory remarks regarding the recent expansion of the market for life insurance securitization and life settlement plans, noting the need to address the question of whether additional regulation is necessary prior to the occurrence of any crisis, as evidenced by the residential and commercial mortgage securitization meltdown. Each also questioned the moral implications for permitting such activities, which they analogized to gambling on a person’s life expectancy.

Ms. Dubberly testified to the development of a Life Settlements Task Force established within the SEC. The task force will focus on investors, sales practices and intermediaries in the life insurance securitization market, in order to advise the Commission on whether market practices and regulatory oversight can be improved. Ms. Dubberly also testified to the need for “clear disclosure” and a better understanding of the investor protections afforded in the context of sales practices with respect to individual and pools of life insurance policies. She further explained the need to work across a variety of regulatory bodies, and noted that the Financial Industry Regulatory Authority (FINRA) issued a regulatory notice earlier this year “reminding firms that variable life insurance settlements are securities transactions subject to the federal securities laws and FINRA rules….” She further acknowledged that the failure for courts to determine whether life insurance settlements constitute a securities transaction has limited the SEC’s enforcement power to protect investors.

Ms. Voss testified about the recently emerging “stranger-owned life insurance” (STOLI), noting the inherent conflict between public policy reasons for obtaining life insurance policies and the STOLI transactions, in which the insurance policies are obtained solely for the purpose of immediate sale. Stating that as states crack down on STOLI transactions, individuals and firms are turning to life insurance securitization for liquidity and funding, respectively. She argued that the development of a market for life insurance securitization would result in increased premiums, as fewer policyholders choose to let their policies lapse.

Mr. Forsett testified to the adequacy of state regulations, arguing in favor of life settlement plans and against any preemption of state laws by federal law. He argued the benefit to senior citizens of realizing a greater economic benefit for their investment through a life settlement plan. Mr. Pardo also advocated the benefits of a system that allows people to sell their existing life insurance policies; however, he advocated the creation of a uniform regulatory system, arguing that the discrepancies among the state regulators created too much confusion. Mr. Kelly also argued for a uniform regulatory structure, and attempted to dismiss the notion that life settlements and life insurance policy securitizations would be the “next subprime mortgage crisis.” Mr. Gearhart also testified to the problems inherent in multiple jurisdictional authorities and noted that several states have no consumer protection laws geared toward life settlement transactions. Mr. Strongin advocated increased consumer protection laws, but also argued that life settlement securitizations would not become the next “subprime mortgage crisis.” Finally, Mr. Curry testified about the role of rating agency review in the context of securitizations, particularly life settlement transactions, and noted that the current financial crisis could “form the basis for a prudent regulatory framework applicable to life settlement securitizations.”

Questions from subcommittee members focused primarily on issue of regulation uniformity and whether it would be appropriate to have one federal regulatory framework, or have a federal regulatory framework supplemented by state laws and regulations, or leave the regulatory framework as it currently stands. As expected, the panel’s responses generally concluded that a uniform, federal regulatory regime would be preferable to the mix of state regulations currently governing these products.