California Insurance Department Defends COI Law

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By Donna Horowitz, THE DEAL PIPELINE

June 11, 2019

The California insurance regulator defended the state’s new cost-of-insurance law after two market members said they viewed it as a weak response to often massive rate increases.

The legislation at issue, AB 2634, was signed by former Gov. Jerry Brown in September.

After receiving thousands of complaints about the rate increases, mainly from “distressed seniors,” former Insurance Commissioner Dave Jones backed the bill that gives policy owners 90 days’ notice of impending rate increases. The notice requirement will take effect July 1.

In its Sept. 19 press release, the California Department of Insurance said consumers received little or no notice from their insurers when the “charges doubled, tripled or quadrupled almost overnight.”

In one case, the department said the rate went up 672%.

Both Michael Freedman, CEO of LightHouse Life Solutions LLC, and Jule Rousseau, an attorney with the Arent Fox LLP law firm, said last month they were disappointed in the bill and a similar measure that passed in Texas in May, which now awaits the governor’s signature.

Freedman called the adoption of the COI notice laws to be a “fairly anemic response” and that regulators and legislators should be “far more vigilant in holding life insurance companies accountable for forcing seniors out of their life insurance policies after years of dutiful payments of premiums.”

Rousseau also had said in an email that the California bill was “probably better than nothing,” but that he didn’t regard it as a good bill. He said it wouldn’t prevent rate increases and that the life settlement option should have been mentioned if the insured was thinking of lapsing or surrendering a policy due to the increase.

As to why the legislation didn’t require insurers to let seniors know about the option of a life settlement, the department said in a written response to The Life Settlements Report that the measure was “modeled after what we observed to be insurance industry best practices regarding notices and options at the time of Cost of Insurance (COI) increases, which at the time, did not include a suggestion that Life Settlement may be an option.”

The department said, however, that the bill does allow insurers to add a life settlement as an option if they choose to do so.

This isn’t likely to happen voluntarily because insurers have fought legislation in various states requiring them to disclose life settlements if seniors were thinking of surrendering or lapsing policies. They’ve said it’s not their job to market a competing industry’s product.

The department reiterated that the intent of the legislation was to respond to consumer complaints it had received over the years, but because “we haven’t seen a complaint trend involving the life-settlement situation, AB 2634 doesn’t address this situation.”

As to why the department didn’t seek to rein in the rates by requiring approval before they took effect, the department responded that “California law does not currently require insurers to seek prior approval for rate increases for life insurance products.”

This differs from a COI regulation that went into effect in New York in March 2018. The New York Department of Financial Services has 120 days to review such rate increases before they can be implemented. Policy owners also get 60 days’ advance notice of increases.

As to whether the legislation would discourage insurers from raising COI rates, the department  responded: “The intent of the bill was to provide consumers sufficient notice of increased charges and opportunity to make a decision that works best for them.

“Since insurers are required to provide at least 90 days notice before any increase in the cost of insurance applies to consumers, it will give consumers better and more complete information about the effect of insurer cost increases. … This will ensure that insurers are no longer raising these rates and providing their policyholders with little or no notice prior to the increase, which has been the previous practice of many insurers.”

Brad Wenger, president and CEO of the Association of California Life & Health Insurance Companies, said his trade group, which represents 41 insurers, participated in the deliberative process for the bill, but he didn’t see any involvement by representatives of the life settlement industry.

He said his group originally opposed the bill, but then submitted what he described as “mostly technical amendments” or “clarifying amendments,” which were incorporated in the bill. Then, the group withdrew its opposition and was neutral toward it.

“Carriers don’t increase the cost lightly and it’s not done without justification and actuarial support,” Wenger said, adding such increases have to pass muster with regulators.

The insurance department confirmed that it worked with the life insurance trade group throughout the legislative process, but that it remained neutral.

As to Freedman’s comments criticizing the bill, Wenger only would say: “I don’t think those statements deserve a response.”

The news about California’s new COI law first surfaced in a lawsuit by entities connected to BroadRiver II (Ireland) Ltd., which was filed last month against Transamerica Life Insurance Co.

Khai LeQuang, an attorney with the Orrick, Herrington & Sutcliffe LLP law firm in Irvine, Calif., who represents the BroadRiver parties, said he only became aware of the bill when the legislative process was pretty far along.

But he said he didn’t remember exactly when he learned about the legislation except that he came across it while reading materials as part of his work as a lawyer representing life settlement investors in COI litigation.

Darwin Bayston, former CEO and president of the Life Insurance Settlement Association, said in an email that the trade group subscribed to Westlaw, an online legal research service for lawyers and legal professionals, to help it keep track of legislation and regulation, but he still didn’t learn about the California bill.

“I do not know why LISA, any of its members or those who closely follow legislative matters were unaware (of the legislation),” he said. “I have not gone back to examine the timing of the introduction of the legislation, the schedules of any hearings, or who in the industry has any knowledge about what/where the motivation of the sponsors originated.”

One possibility is that the bill doesn’t specifically mention cost of insurance, but only refers to required notice of adverse changes in “nonguaranteed elements” of an insured’s policy.

When originally reached while driving without his files available, Jack Kelly, managing director of the Institutional Longevity Markets Association, didn’t seem to remember the California bill. But he later recalled that he knew of the legislation, thought it was an improvement over how policy owners are notified of increases, but he didn’t propose any amendments or get involved in the process.

Freedman, a well-known lobbyist in the market, who has been advocating federal legislation,  didn’t know about the bill.

He described the process for learning about such measures.

“Staying up to date on legislative and regulatory happenings is often done through paid subscriptions to legislative/regulatory tracking services that are tied into state legislative and regulatory databases. Westlaw is one such service,” he said in an email. “In addition, local lobbyists usually provide bill tracking within their states.”

But he hasn’t had access to those services in recent years.

“For me personally, I wasn’t at GWG or with LISA for almost two years – from May 2017 until recently, so I didn’t have access to such resources,” he said, referring to GWG Holdings Inc. (GWGH), where he was president until leaving two years ago. He recently rejoined the trade group.

Harvey Rosenfield, founder and counsel for Consumer Watchdog, a nonprofit consumer-protection group in Santa Monica, Calif., also was surprised to learn about the new law. His group has been filing COI litigation against carriers, and won a $110.7 million class-action settlement against Transamerica in February.

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