Legislature(1999 - 2000)

01/31/2000 01:12 PM JUD

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HB 190 - VIATICAL SETTLEMENTS                                                                                                 
CHAIRMAN KOTT announced  that the committee would  hear HOUSE BILL                                                              
NO. 190, "An Act relating to viatical settlement contracts."                                                                    
Number 0084                                                                                                                     
REPRESENTATIVE ROKEBERG  presented the bill.  He  pointed out that                                                              
before  the committee  was  CSHB 190(L&C),  Version  M, which  had                                                              
passed  out of  the House  Labor and  Commerce Standing  Committee                                                              
[which he chairs and which sponsored  the legislation].  The issue                                                              
was brought  to that  committee's attention  the previous  year by                                                              
the  Division of  Banking, Securities  &  Corporations (DBSC),  as                                                              
well  as by  constituents and  others primarily  in the  insurance                                                              
business in Alaska.                                                                                                             
REPRESENTATIVE  ROKEBERG  introduced   related  terms.    Viatical                                                              
settlements  are  contracts  that  historically  have  involved  a                                                              
chronically ill person who has an  insurance policy that he or she                                                              
wishes to  sell on  a discounted  basis before  his or her  death,                                                              
thereby receiving  the funds and being  able to use them  prior to                                                              
death.  He  said these contracts  are, in turn, sold  to investors                                                              
on a discounted  basis.  The viator  is the person who  is insured                                                              
by the  policy.  The viatical  settlement provider is  the "middle                                                              
man"  who packages  these arrangements.   And  finally, agents  or                                                              
brokers are those  who sell either entire policies,  or fractional                                                              
shares thereof, into the marketplace.                                                                                           
REPRESENTATIVE   ROKEBERG  mentioned   what   he  called   "cross-                                                              
jurisdictional   interpretation"  and   work  with  the   National                                                              
Association of  Insurance Commissioners  (NAIC) on establishing  a                                                              
statutory  or regulatory  scheme for  this.  He  pointed out  that                                                              
case law  is split in various  states' jurisdictions about  how to                                                              
regulate this new phenomenon.  There  is controversy about whether                                                              
it  is a  securities-type  of  contract,  to be  administered  and                                                              
regulated by  a state's securities  division, and/or  an insurance                                                              
contract, to be  administered by a division of insurance.   To his                                                              
understanding, approximately 26 states  now have dual jurisdiction                                                              
in this regard.                                                                                                                 
Number 0315                                                                                                                     
REPRESENTATIVE  ROKEBERG  noted  that  the  original  HB  190  had                                                              
suggested  the  DBSC would  administer  regulations.   However,  a                                                              
number  of  people in  the  insurance  industry and  the  national                                                              
association of viatical settlement  providers had wanted insurance                                                              
overview as  a "turf area."   There is an issue  regarding whether                                                              
to  maintain  state -  rather  than  federal -  jurisdiction  over                                                              
insurance matters, and these are areas of great sensitivity.                                                                    
REPRESENTATIVE  ROKEBERG advised members  that the system  arrived                                                              
at - after a  year and a half of work and several  hearings in the                                                              
House  Labor   and  Commerce  Standing   (HL&C)  Committee   -  is                                                              
relatively  simple.   The system  stipulates  jurisdiction on  the                                                              
sales  of  these  contracts  to  the  investor  as  securities  or                                                              
investments.   This is  an area where  there has been  substantial                                                              
abuse.   For  example, on  the Internet  a person  can find  bogus                                                              
"guaranteed" substantial  rates of return  for these.  There  is a                                                              
real need for consumer protection.                                                                                              
REPRESENTATIVE ROKEBERG pointed out  that another element combines                                                              
a viatical settlement, which relates  to a chronically ill person,                                                              
with a life settlement contract,  which allows a basically healthy                                                              
person to enter into the market and  sell, at a discount, the face                                                              
value in the  policy.  If a  man has a paid-up whole  life policy,                                                              
for  example, this  provides  the ability  and  the mechanism  for                                                              
that.  A person  with a $100,000 or $500,000  fully paid-up policy                                                              
could sell it before  death and use the money to  put the children                                                              
through college  or buy a house,  for which this  legislation also                                                              
Number 0514                                                                                                                     
REPRESENTATIVE  ROKEBERG  explained that  the  HL&C Committee  had                                                              
decided  to place  Alaska in  a situation  where  the consumer  is                                                              
protected  from  an investment  standpoint  and  regulated by  the                                                              
DBSC.   Furthermore, the  relationship between  the insured  - the                                                              
viator -  and the provider who  packages these would  be regulated                                                              
by the Division of Insurance, which  historically has looked after                                                              
the interests  of the insured  and insurance regulations.   Noting                                                              
that this is  perhaps what generates some criticism,  he said this                                                              
sets up  dual jurisdiction  only because it  makes sense;  it also                                                              
sets  up,  unfortunately,  dual  sets  of  regulations,  which  he                                                              
believes will be relatively modest.                                                                                             
REPRESENTATIVE  ROKEBERG referred  to the  two zero fiscal  notes.                                                              
He pointed  out  that the one  from the  HL&C Committee  is  to be                                                              
replaced  by one  dated 1/24/00  from the  Division of  Insurance.                                                              
Referring to the  analysis in the latter, he expressed  the belief                                                              
that the zero amount is justifiable  because any dollars generated                                                              
will be  offset by income.   He  deferred to representatives  from                                                              
the Division of Insurance and the DBSC for further explanation.                                                                 
Number 0612                                                                                                                     
CHAIRMAN   KOTT    noted   other   committee    members   present:                                                              
Representatives  Croft, Green, Kerttula,  James and Rokeberg.   He                                                              
suggested experts available in person  and on teleconference could                                                              
answer any  questions that might arise.   He then called  on Vince                                                              
Number 0673                                                                                                                     
VINCE  USERA, Senior  Securities  Examiner,  Division of  Banking,                                                              
Securities  &  Corporations  (DBSC),  Department  of  Community  &                                                              
Economic  Development (DCED),  said he had  no prepared  testimony                                                              
but would answer questions.  He then reported:                                                                                  
     Our approach to  this was to ask simply for  a change in                                                                   
     the  definition  of  "security,"   to  add  in  viatical                                                                   
     settlement interests, and ...  to keep it as flexible as                                                                   
     possible,  because this is  an evolving field,  changing                                                                   
     very  quickly.   And  we  can  meet those  changes  with                                                                   
     regulations  a  lot  more  quickly   than  with  further                                                                   
     legislation.  ... Our  regulations, for  the most  part,                                                                   
     mirror the  legislative provisions that were  in the old                                                                   
     HB  190,  ...  modified by  some  suggestions  from  the                                                                   
     Viatical Association of America [VAA].                                                                                     
Number 0756                                                                                                                     
CHAIRMAN  KOTT  asked whether  the  VAA endorses  this  particular                                                              
piece of legislation.  He said he  hadn't heard any reactions from                                                              
MR. USERA answered:                                                                                                             
     I don't know  if I can say they're endorsing;  they have                                                                   
     no problems  with it.  ... We  very carefully went  over                                                                   
     every  bit  of  it  with  them,  and  they  pretty  much                                                                   
     approved  it.  ...  We've used  all  their  definitions,                                                                   
     definitions  that  are  pretty   well  mirrored  by  the                                                                   
     National Association of Insurance  Commissioners.  So, I                                                                   
     think  we can say  that they're  in favor  of the  bill,                                                                   
     perhaps not going  ... quite so far as to  say they love                                                                   
Number 0813                                                                                                                     
REPRESENTATIVE  GREEN  asked,  from   the  securities  standpoint,                                                              
whether Mr. Usera sees a potential here for fraud.                                                                              
MR.  USERA  replied  that  the  potential  lurks  everywhere,  and                                                              
without this legislation, there would  be a lot of room for fraud.                                                              
The approach of the HL&C Committee,  the Division of Insurance and                                                              
the DBSC  has been that the  Division of Insurance  should oversee                                                              
the portion  of the  transaction covering  the actual purchase  of                                                              
the policy,  thereby protecting the  insured and  those associated                                                              
with  that side  of the  contract; the  DBSC would  take over  the                                                              
securities  end of  it.   He  emphasized  the  hope of  minimizing                                                              
fraud, noting that the DBSC's disclosure  procedure requires quite                                                              
a bit of information before granting an exemption.                                                                              
Number 0952                                                                                                                     
REPRESENTATIVE CROFT  requested confirmation that the  zero fiscal                                                              
note  is  because  the  division  will  establish  regulations  to                                                              
collect enough money to pay for the cost of administering these.                                                                
MR.  USERA responded,  "It  won't  cost us  very  much  at all  to                                                              
oversee these things, any more than what we're doing now."                                                                      
REPRESENTATIVE CROFT  asked about the analysis in  the Division of                                                              
Insurance  fiscal note,  which stated:   "It is  unknown how  many                                                              
registrations  will be  received  and processed.   Fees  collected                                                              
will cover expenses.  Zero fiscal impact."                                                                                      
MR. USERA clarified  that he works for the DBSC,  not the Division                                                              
of Insurance.  He then stated:                                                                                                  
     We  actually  will charge  $250  for each  person,  each                                                                   
     viatical settlement company  coming in, and then $75 per                                                                   
     agent.   That goes to the  general fund and  doesn't ...                                                                   
     offset any of our expenses at all.                                                                                         
Number 1003                                                                                                                     
REPRESENTATIVE  JAMES  pointed  out  that it  affects  the  budget                                                              
process, then.   If money comes in, it has to  be appropriated, so                                                              
there would be a fiscal note.                                                                                                   
CHAIRMAN KOTT  added that  it would be  assuming someone  does buy                                                              
into it and apply for the license.                                                                                              
Number 1021                                                                                                                     
REPRESENTATIVE ROKEBERG  called CSHB 109(L&C) the  "light version"                                                              
of  the bill.   He  said Section  4  gives the  DBSC authority  by                                                              
adding  "viatical  settlement  interest"   in  the  definition  of                                                              
"securities."     Then  the  bill  defines   "viatical  settlement                                                              
interest"  and  "viator."    The  DBSC  has  already  drafted  the                                                              
regulations, he  pointed out.  Therefore,  any cost from  that has                                                              
been absorbed by  the DBSC in the general course  of business.  He                                                              
requested  confirmation  that in  1998  more  than $1  million  in                                                              
"viatical business" was written in Alaska.                                                                                      
MR. USERA  clarified  that it  was in  1998 and 1999.   Until  his                                                              
division "kind of  put a stop to it," the amount  was $1.5 million                                                              
in policies sold here.                                                                                                          
REPRESENTATIVE  ROKEBERG  said the  division  had  stepped in  and                                                              
issued a number of "cease and desist"  orders to practitioners who                                                              
didn't have  what the division believed  was licensure.   The HL&C                                                              
Committee  had then  stepped in  because  an area  of commerce  in                                                              
Alaska was  stalled because  of lack of  regulation; it  was their                                                              
judgment  that   the  legislature   needed  to  ensure   that  the                                                              
regulatory scheme  was fair, proper and developed  in a reasonable                                                              
REPRESENTATIVE  ROKEBERG returned attention  to the  fiscal notes.                                                              
He  said he  had  requested zero  fiscal  notes  "for the  obvious                                                              
reasons that  befall all legislation  that generates some  kind of                                                              
fiscal  notes."    He  believes the  fiscal  notes  would  be  "de                                                              
minimis, if at all,  and should be able to be  handled through the                                                              
normal appropriations within each  division and/or the expectation                                                              
that there  would be  some revenue generated."   He suggested  the                                                              
foregoing offsets any need for a fiscal note.                                                                                   
Number 1167                                                                                                                     
CHAIRMAN KOTT asked  Mr. Usera to comment briefly  on Securities &                                                            
Exchange  Commission  v.  Life  Partners,  Inc.  [discussed  in  a                                                            
document  prepared  by  the  DBSC   titled  "Policy  Statement  on                                                              
Viatical  Settlement Contracts,"  in  committee  packets] and  the                                                              
position that the state is taking.                                                                                              
MR. USERA  said he thinks  it is a  poorly reasoned decision.   He                                                              
believes  the D.C.  Circuit  judges saw  it  as a  way around  the                                                              
ravages  of AIDS  [acquired  immunodeficiency  syndrome] and  were                                                              
looking at  the social utility,  not the  potential for harm.   He                                                              
suggested they therefore  made it fit within their  view, and they                                                              
are the  only ones  who seem  to think  that way.   He added  that                                                              
every other  state, practically, has  either issued an  opinion or                                                              
verbally stated the belief that it is a security.                                                                               
Number 1233                                                                                                                     
REPRESENTATIVE  KERTTULA  pointed out  that  the  original HB  190                                                              
required that information  be provided directly to  the buyers, so                                                              
they could  make an  informed investment  decision.  However,  she                                                              
doesn't find that same language in  the committee substitute (CS).                                                              
She inquired about protection.                                                                                                  
MR. USERA replied  that it is found in regulations.   He mentioned                                                              
that he  had copies  of the  disclosure forms  which his  division                                                              
will use, with seven pages of disclosures  that they believe, at a                                                              
minimum,  should be  provided.  If  people read  those, they  will                                                              
understand a fair amount about the transaction.                                                                                 
Number 1267                                                                                                                     
REPRESENTATIVE ROKEBERG directed  attention to page 2, line 20, of                                                              
CSHB 190(L&C), noting that the Division  of Insurance, in drafting                                                              
regulations, is  to address issues  of privacy too.   He suggested                                                              
that because of  Alaska's constitution and the  esteem for privacy                                                              
rights in  the state, this  is a touchy area  as to how it  can be                                                              
put together.   For an investor,  there is a question of  how much                                                              
information can reasonably  be expected about the  viator in order                                                              
to  make a  reasonable  judgment  as to  whether  it  is a  decent                                                              
investment.   Representative  Rokeberg said  the DBSC has  already                                                              
drafted  basic  privacy provisions,  and  the important  thing  is                                                              
ensuring that the regulatory scheme is consistent.                                                                              
MR.  USERA  agreed  that  privacy  is  already  addressed  in  his                                                              
division's regulations.                                                                                                         
REPRESENTATIVE  KERTTULA   emphasized  that  it  depends   on  the                                                              
adoption of regulations, rather than being in the bill.                                                                         
MR. USERA indicated his division  had checked with the NAIC, which                                                              
has, on  a national basis,  come up with  some definitions  and is                                                              
wrestling with others; those are evolving.  He then explained:                                                                  
     We  might have to  change the  regulations quickly,  but                                                                   
     that  can   be  done  more  easily  than   ...  drafting                                                                   
     legislation or  pushing legislation through.   And we're                                                                   
     always  subject   to  the  legislature's   oversight  on                                                                   
     regulations.    I don't  think  it's any  risk  involved                                                                   
     there.   We  can probably  pay more  rapid attention  to                                                                   
     changing demands.                                                                                                          
Number 1396                                                                                                                     
CHAIRMAN KOTT  pointed out  that before investing  in any  type of                                                              
security, he  himself generally  asks for a  prospectus and  has a                                                              
pretty  thorough understanding  of the  risk involved.   He  asked                                                              
whether Mr. Usera envisions circumstances  under which the name of                                                              
the insured would be released.                                                                                                  
MR. USERA replied:                                                                                                              
     Their  name would not  be released,  not in this  state.                                                                   
     ... As I view it, it would be  against the constitution,                                                                   
     a constitutional violation of  privacy.  We don't have a                                                                   
     prospectus per se, but we have  our seven- or eight-page                                                                   
     disclosure, which  does the same.   We feel  it educates                                                                   
     the  investing public  sufficiently that  they can  know                                                                   
     whether it's right for them or not.                                                                                        
Number 1443                                                                                                                     
REPRESENTATIVE GREEN  asking whether it is legal,  for example, if                                                              
he  buys  an  insurance  policy for  himself,  becomes  ill,  then                                                              
negotiates with the insurance company  to provide discounted money                                                              
up-front.   He also asked whether  it is legal if  another person,                                                              
in the same scenario, buys the policy for a discounted fee.                                                                     
MR. USERA affirmed both.                                                                                                        
REPRESENTATIVE GREEN suggested this  bill, then, ensures oversight                                                              
so  the viator,  or  someone representing  him,  hasn't duped  the                                                              
purchaser into thinking the viator  is more ill than he really is.                                                              
He requested  confirmation that this  bill doesn't change  what is                                                              
already legal but instead provides oversight.                                                                                   
MR. USERA  said this  is already  legal, then  indicated the  bill                                                              
protects both  sides:  the investing  public and the  company that                                                              
buys  the policy  and  sells it  to the  investor.   He  expressed                                                              
uncertainty as to whether it is possible  for the division to make                                                              
sure the insured isn't duped and  given too little for the policy.                                                              
Number 1535                                                                                                                     
REPRESENTATIVE  GREEN inquired about  the possibility  of changing                                                              
one's mind  after a few days.   He asked whether that  is legal if                                                              
an agreement has  been reached specifying the time  in which to do                                                              
MR. USERA  said he doesn't  know about  the legality of  that now.                                                              
Its legality  depends on one's right  to abrogate a contract.   He                                                              
indicated the  DBSC's regulations  from the investment  standpoint                                                              
would allow ten business days to recant.                                                                                        
REPRESENTATIVE GREEN  suggested that would be between  the insured                                                              
and the purchaser, not between the insured and the division.                                                                    
MR. USERA affirmed that.                                                                                                        
REPRESENTATIVE  GREEN asked  what would  protect the purchaser  if                                                              
the insured  either  benefits from  a miracle  drug or decides  to                                                              
rescind  this.   He asked  if that  is  where the  DBSC comes  in,                                                              
because this is a securities deal, not an insurance deal.                                                                       
MR. USERA replied:                                                                                                              
     If you suddenly  find that there's a miracle  drug comes                                                                   
     along, and you're  going to live forever,  that makes it                                                                   
     a  bad investment  for [the  purchaser].   However,  ...                                                                   
     we're  going to tell  you to  take a look  at that.   We                                                                   
     can't tell you  that it's happening or going  to happen.                                                                   
     We're  going  to  tell  you,  "Think  about  it."    The                                                                   
     evolving  medical situation  is  something to  consider.                                                                   
     It may be that the person has  a life expectancy of five                                                                   
     years.  All of a sudden, we  find a new drug comes along                                                                   
     and it's  ten years  ... before you  get a repayment  on                                                                   
     your money, plus  you're going to have to  be paying out                                                                   
     on  the premiums.  ... It'd  be a  very bad  investment.                                                                   
     Our disclosure makes sure you know about such things.                                                                      
Number 1631                                                                                                                     
REPRESENTATIVE  GREEN  noted  that   this  originally  related  to                                                              
viatical  settlements but  has  gone beyond  that.   He  suggested                                                              
there  may be  an  expectation that  the  purchaser  would have  a                                                              
chance to  make some  money.   He asked  if anything protects  the                                                              
MR. USERA answered:                                                                                                             
     We don't have anything in our  packets that specifically                                                                   
     says the  life expectancy of  a 35-year-old man  is "X."                                                                   
     But we  will tell  you that ...  until the person  dies,                                                                   
     you're  going to  have  to wait  for  a return  on  your                                                                   
     money.  And  we'll tell you whether he's  in good health                                                                   
     or bad  health, and  things to  consider in making  your                                                                   
     investment.   I frankly don't  see very many of  the ...                                                                   
     "life settlements" for the moment,  because I understand                                                                   
     that  NAIC is changing  that.  ... It's too  hard ...  -                                                                   
     they're the insurance  side of things - to  quantify and                                                                   
     define.    We've taken  out  any reference  to  terminal                                                                   
     illness that used to be in the  viatical definition, and                                                                   
     we've put  them all together;  everything is  a viatical                                                                   
     now.  But  if you're buying the policy of  a 35-year-old                                                                   
     man and he's  in excellent health, it may not  be a good                                                                   
     idea if you're expecting a speedy return.                                                                                  
Number 1726                                                                                                                     
REPRESENTATIVE  GREEN  asked  what   protection  exists  once  the                                                              
process is  begun.   For example,  is an  escrow involved  and all                                                              
things must  come to pass at the  same time?  He indicated  he was                                                              
talking about someone trying to be dishonest.                                                                                   
MR. USERA explained:                                                                                                            
     The  way  it  happens  in many  cases  is  the  viatical                                                                   
     company will come to you, ...  sell you not a policy but                                                                   
     sell you on  buying a policy.  And they'll  ask you such                                                                   
     macabre questions as "What kind  of policy do you want?"                                                                   
     "I'm looking for an investment  ... in a 35-year-old man                                                                   
     with  AIDS  due  to  die in  two  years;  those  are  my                                                                   
     specifications."   Then  they  go find  somebody who  is                                                                   
     willing to part with his policy on those terms.                                                                            
     We have,  built in  to our system,  a 90-day  rescission                                                                   
     period:   if they  don't find  somebody within 90  days,                                                                   
     they have to offer you rescission  from the entire deal.                                                                   
     But  the money doesn't  actually change  hands quite  so                                                                   
     fast  as  you   can  go  off  to  Bermuda   before  [the                                                                   
     purchaser] has had a good time to think about it.                                                                          
REPRESENTATIVE  GREEN  suggested  it  is  like  an  escrow,  then.                                                              
Everything must come to pass at once,  and the insured can't cheat                                                              
anywhere along the line until it  is a "done deal."  He stated his                                                              
understanding  that the  insured  wouldn't get  his  or her  money                                                              
until the purchaser was finished with the transaction.                                                                          
MR. USERA  pointed out that he  has seen people  cheated virtually                                                              
everywhere,  although  the  division  would try  to  minimize  it.                                                              
"That's why we think it's a risky investment," he added.                                                                        
REPRESENTATIVE  GREEN  asked  whether the  insurance  company  can                                                              
rescind this agreement as well as the insured can.                                                                              
MR. USERA clarified that generally  an insurance company isn't the                                                              
so-called provider.  Generally, there  is an insurance company and                                                              
the  insured; then  a person  comes along  and offers  to buy  the                                                              
policy and  become the owner  of the  policy, for 25  percent, for                                                              
example;  that person  then offers  to  sell an  interest in  that                                                              
policy.   The insurance  company is separate,  really not  part of                                                              
the transaction  as it will normally  occur.  He  reemphasized the                                                              
desire  to  minimize  cheating by  having  these  regulations  and                                                              
disclosure  requirements, then  concluded, "As  it goes now,  they                                                              
don't tell  you a  thing.  They  just tell you  what a  great deal                                                              
this is, and you could make 40 percent on your money ...."                                                                      
Number 1877                                                                                                                     
CHAIRMAN KOTT  voiced his understanding  that the  division's main                                                              
responsibility  is ensuring  that the  investor has  every bit  of                                                              
information reasonably  available to make  a good decision.   With                                                              
viatical  settlements,  the risk  is  that  the person  will  live                                                              
longer than  expected; the longer  the person lives, the  worse it                                                              
becomes  for   the  investor.     Chairman  Kott   inquired  about                                                              
protection for the  insured, provided by the DBSC  or the bill, to                                                              
ensure he or she receives fair market value.                                                                                    
MR. USERA said that has been made  the province of the Division of                                                              
Insurance, which should probably address it.                                                                                    
CHAIRMAN  KOTT asked  whether there  have been  any complaints  in                                                              
that area regarding viaticals in Alaska.                                                                                        
MR. USERA replied:                                                                                                              
     No.  They  complain about us looking at them,  more than                                                                   
     anything else.   But we  questioned most of  the buyers,                                                                   
     most  of the investors,  and asked  them such  questions                                                                   
     as, "Was it explained to you  that this was a sale of an                                                                   
     insurance  policy during the  contestability period,  or                                                                   
     could  be?"   And  they  said,  "What's  'contestability                                                                   
     period?'"  That's the kind of  thing that people need to                                                                   
     know, because  at any time during that  two-year period,                                                                   
     the insurance company can just  drop it; they can refuse                                                                   
     to pay.   So, contestability  is one thing they  need to                                                                   
     know;  whether it's  a group  policy,  because that  has                                                                   
     some issues  to it; what the  premium is; how  much [in]                                                                   
     premiums ...  the viatical provider  is going  to escrow                                                                   
     ... to pay the premiums coming up. ...                                                                                     
     We  can't tell  them ...  which way  to go  but what  to                                                                   
     think about, and consider whether  medical science today                                                                   
     is as hamstrung  as it was 30 years ago  - probably not.                                                                   
     And  if a  quick return  on  your money  is what  you're                                                                   
     looking for, then  it may not be an investment  for you.                                                                   
     Protecting the  insured, I think, is a worthy  goal, but                                                                   
     ... I'll  leave that to  [the Division of]  Insurance to                                                                   
     talk about.                                                                                                                
Number 2046                                                                                                                     
CHAIRMAN  KOTT recalled  a similar financial  relationship  in the                                                              
banking arena,  in which individuals  can buy an  elderly person's                                                              
mortgage, for example,  at a discount.  He asked  whether the DBSC                                                              
oversees that as well.                                                                                                          
MR.  USERA replied,  "Not  in 'securities,'  we  don't.   I  don't                                                              
believe  that  the banking  side  does,  but  I couldn't  say  for                                                              
Number 2060                                                                                                                     
REPRESENTATIVE   KERTTULA   asked  Mr.   Usera   to  explain   the                                                              
contestability period.                                                                                                          
MR. USERA  responded that  the first two  years of any  policy are                                                              
known as the contestability period,  and the insurance company can                                                              
decline to  pay if the person  commits suicide during  that period                                                              
or has lied  on the application.   For instance, if a  person with                                                              
AIDS has denied that, then turns  around and sells the policy, the                                                              
insurance company  can refuse  to pay if  they discover  that fact                                                              
during the two-year period.                                                                                                     
REPRESENTATIVE KERTTULA asked whether this is illegal anywhere.                                                                 
MR. USERA  said not that he  knows of, although many  people don't                                                              
like it.  "It's something that we  pretty much have to permit," he                                                              
Number 2104                                                                                                                     
REPRESENTATIVE CROFT  expanded on Representative  Green's analogy,                                                              
suggesting  the  purchaser  would   approach  a  broker,  not  the                                                              
insured,  looking to  buy the  insurance  policy of  someone in  a                                                              
particular situation,  for example.  The broker has  nothing to do                                                              
with the original insurance agent of the insured, he noted.                                                                     
MR. USERA affirmed that.                                                                                                        
REPRESENTATIVE CROFT asked if there are limits on profits.                                                                      
MR.  USERA said  he doesn't  think there  are any  limits, and  he                                                              
doesn't know whether  the Division of Insurance plans  to set any.                                                              
He  recounted how  one Florida  company  had said  they'd paid  45                                                              
percent of  the face  value of  the death  benefit to the  viator.                                                              
However, audits  of their financial  records - done,  he believes,                                                              
by  Florida's division  of insurance  - showed  the actual  amount                                                              
paid  was  22  percent.    The  difference  wasn't  accounted  for                                                              
anywhere.  On a $100,000 policy,  they paid the person $22,000 but                                                              
claimed they  paid $45,000,  which was  reported to the  investor.                                                              
Mr. Usera  surmised  that it went  "in the  pocket," human  nature                                                              
being what it is.                                                                                                               
Number 2233                                                                                                                     
REPRESENTATIVE  GREEN asked:    Would the  purchaser  look to  the                                                              
broker  to buy  a policy  on a  person with  a particular  medical                                                              
situation?  Or might the purchaser  look to the broker for several                                                              
insured people?                                                                                                                 
MR. USERA explained:                                                                                                            
     He can go  a couple of ... different ways.   A salesman,                                                                   
     let's  say, for  the viatical  settlement provider,  has                                                                   
     already bought  ... your insurance policy.   He can then                                                                   
     approach  [the purchaser] and  say, "Have  I got a  deal                                                                   
     for you!"   And  [the purchaser]  could then say,  "I'll                                                                   
     buy that policy,  and I've got some more  to invest, but                                                                   
     I'd  really like  to invest  in a  45-year-old guy  with                                                                   
     AIDS having two  years to live; can you go  out and find                                                                   
     me one of  those?"  So, ... there's two  permutations on                                                                   
     the sales program.                                                                                                         
Number 2268                                                                                                                     
REPRESENTATIVE GREEN  stated his understanding that  purchases are                                                              
made  on individual  policies,  then,  rather  than on  groups  of                                                              
people  with particular  medical  conditions, for  example.   Like                                                              
stock, a purchaser could buy part of it.                                                                                        
MR. USERA responded:                                                                                                            
     Right.    Well, there's  that,  too.    It may  be  that                                                                   
     there's a $100,000 policy is  going to be split up among                                                                   
     ten investors,  so they each  have the right  to receive                                                                   
     $10,000.  They  may pay $5,000 for that privilege.   So,                                                                   
     there would be another permutation ....                                                                                    
REPRESENTATIVE GREEN  asked if a  purchaser would buy into  a pool                                                              
of several  insureds.  He agreed  with a suggestion that  it would                                                              
be sort of a "death mutual fund."                                                                                               
MR.  USERA said  he  didn't see  why not,  but  they haven't  been                                                              
packaged  that  way, to  his  knowledge,  because there  would  be                                                              
different death dates  and it would be too hard to  determine.  He                                                              
clarified  that the  pooling that  goes on is  ten people  getting                                                              
together to buy one policy, for instance.                                                                                       
Number 2320                                                                                                                     
REPRESENTATIVE  JAMES said  she had been  envisioning that  people                                                              
buying  these   would  become   beneficiaries  on  the   policies.                                                              
However, that  isn't necessarily  the case.   There is  a contract                                                              
that affects that, whether or not  it is on the policy.  She asked                                                              
who is named as beneficiary on the policy.                                                                                      
MR. USERA explained:                                                                                                            
     The owner  of the policy  gets to name the  beneficiary.                                                                   
     And  probably  what happens  most  of  the time  is  the                                                                   
     provider  becomes the  owner, the  technical owner,  who                                                                   
     then  contracts to  name you  ... in  exchange for  your                                                                   
     purchase price.  ... The deal  may be they sell  you the                                                                   
     entire  policy and  you become  the  owner -  therefore,                                                                   
     entitled to name the beneficiary.                                                                                          
REPRESENTATIVE JAMES  recounted how when her mother  died, her two                                                              
life  insurance  policies  were  made  out to  the  funeral  home;                                                              
however, her mother  had lived longer than she'd  expected, and it                                                              
wasn't all covered.  Representative  James suggested that would be                                                              
a similar contract.                                                                                                             
MR. USERA agreed in some ways it is very similar.                                                                               
Number 2403                                                                                                                     
REPRESENTATIVE  CROFT noted that  with insurance,  there can  be a                                                              
stable  investment and  return  because it  is  spread so  widely.                                                              
However, in this  case a purchaser is buying only  one policy, and                                                              
could either make  out well or really lose money.   The problem is                                                              
the individual character of these.                                                                                              
MR. USERA concurred.                                                                                                            
REPRESENTATIVE CROFT suggested that  is why the lists of risks are                                                              
MR. USERA said  he envisions considerable  administrative problems                                                              
in putting  together  an investment  in a pool  of life  insurance                                                              
policies, whether it  involves buying into a pool  of investors in                                                              
a policy or buying one policy alone.  He explained:                                                                             
     Normally what they'll do is  they'll escrow an amount of                                                                   
     money to  pay the premiums expected  to be due.   If the                                                                   
     person  is projected  to live three  years, they'll  put                                                                   
     three years'  premiums aside,  and those don't  come out                                                                   
     of your pocket.   Where the risk is, is  that the person                                                                   
     lives for five years and you've  got to come up with two                                                                   
     more years of premiums.  That  eats into your investment                                                                   
     as well,  and there's  no way to  predict that.   If the                                                                   
     person lives  ten years, you're really getting  hit, and                                                                   
     you  could  lose the  entire  investment by  the  person                                                                   
     living to a ripe old age.                                                                                                  
REPRESENTATIVE ROKEBERG  emphasized that the people  involved want                                                              
to sell the  policies.  It provides  a service so they  can access                                                              
their money.                                                                                                                    
TAPE 00-5, SIDE B                                                                                                               
CHAIRMAN KOTT  called upon Bob Lohr,  director of the  Division of                                                              
Insurance, via teleconference;  there was no response.   He called                                                              
on Katy  Campbell, requested  a brief at-ease  at 2:01  p.m., then                                                              
resumed the meeting immediately.                                                                                                
REPRESENTATIVE CROFT asked Ms. Campbell  why it isn't simplest and                                                              
easiest  to  deal  with  one's  own  insurance  carrier  and  just                                                              
purchase the policy at a cash-out value.                                                                                        
Number 0061                                                                                                                     
KATY CAMPBELL,  Life and  Health Actuary,  Division of  Insurance,                                                              
Department  of Community  &  Economic Development,  answered  that                                                              
there  is   that  option.     Many  insurance  policies   have  an                                                              
accelerated death  benefit provision that would  allow an insured,                                                              
if terminally ill,  to cash in, say, 50 percent -  sometimes up to                                                              
100 percent - of the death benefit.                                                                                             
REPRESENTATIVE  CROFT said  one problem,  then,  is some  policies                                                              
don't allow  for it and some don't  allow 100 percent.   He asked,                                                              
"Also, often, you don't get as good  a deal out of that?  It's set                                                              
in the policy, and it's not what the market would give you?"                                                                    
MS. CAMPBELL explained:                                                                                                         
     It's  probably  a better  deal.  ... If  your  insurance                                                                   
     company   has  that  provision,   they  basically   just                                                                   
     discount  it for interest  for the  period of time  that                                                                   
     your life expectancy  is, so they would discount  it six                                                                   
     months  if you had  a six-month  life expectancy.   It's                                                                   
     just not  in all  of the life  insurance policies;  it's                                                                   
     not a  required provision.   And in some cases,  ... the                                                                   
     restriction that they be terminally  ill, with 12 months                                                                   
     or less  to live, is  also a fairly strict  requirement.                                                                   
     Some  people ... have  a life  expectancy, according  to                                                                   
     their doctor,  for 36 months,  and that provision  can't                                                                   
     be used.                                                                                                                   
Number 0100                                                                                                                     
CHAIRMAN KOTT asked why more insurance companies don't build into                                                               
the policy a mechanism to afford the insured some kind of cash                                                                  
MS. CAMPBELL said she believes it is becoming increasingly common                                                               
to endorse life insurance policies.                                                                                             
CHAIRMAN KOTT asked if Ms. Campbell believes more and more                                                                      
insurance companies will put that in the form of an endorsement                                                                 
in these policies.                                                                                                              
MS. CAMPBELL affirmed that, then explained:                                                                                     
     We  see  more  and  more  endorsements   filed  to  life                                                                   
     insurance policies  ... as they are filed.   They're not                                                                   
     necessarily endorsing  a lot of the ...  older policies,                                                                   
     but  they're  giving people  that  option in  the  newer                                                                   
     policies.   And there's  a tax benefit  if it's  sold to                                                                   
     someone  if  - a  viatical  settlement  transaction  and                                                                   
     accelerated   death  benefit  as   well  -  if   they're                                                                   
     terminally ill,  under the federal tax code  that passed                                                                   
     in 1997.   So,  if they're terminally  ill and it  meets                                                                   
     those conditions, that death  benefit that's paid out is                                                                   
     actually  considered "death  benefit" for tax  purposes;                                                                   
     they're not taxed on it.                                                                                                   
REPRESENTATIVE JAMES remarked on what an incentive that is.                                                                     
CHAIRMAN KOTT asked whether that is dealing with the viatical                                                                   
service provider.                                                                                                               
MS.  CAMPBELL answered  yes, it  can  be, but  it has  to be  very                                                              
specific.   She  indicated that  in the  Internal Revenue  Service                                                              
(IRS)  code,  it  is  defined  specifically   as  someone  who  is                                                              
terminally ill or chronically ill  by the federal definition.  She                                                              
agreed there  is incentive  to do that,  then concluded  by saying                                                              
"the  insurance  companies'  endorsements  have  stuck  with  that                                                              
portion  that   still  considers   it  a  death   benefit  payout,                                                              
Number 0220                                                                                                                     
CHAIRMAN  KOTT  asked  whether,  for  the  insured,  Ms.  Campbell                                                              
believes it  would be  more beneficial to  deal with  the viatical                                                              
provider or  that person's insurance company.                                                                                   
MS.  CAMPBELL suggested  it  is  individual choice,  depending  on                                                              
circumstances.  Insurance companies  sometimes have a provision to                                                              
accelerate only, say,  50 percent of the death benefit.   A person                                                              
who feels  he or she  can get more  through a viatical  settlement                                                              
provider certainly has that option; the market is there.                                                                        
Number 0256                                                                                                                     
REPRESENTATIVE  GREEN asked  whether those  policies are  just for                                                              
viatical situations or are available  for anyone, even if healthy.                                                              
He  further  asked whether  a  person  must  suffer some  sort  of                                                              
catastrophic illness before this sort of thing can happen.                                                                      
MS. CAMPBELL  replied that  a perfectly  healthy insured  who just                                                              
wants to sell his or her policy certainly can do that.                                                                          
REPRESENTATIVE  GREEN asked  whether it  can be  a term policy  as                                                              
well as a whole life policy.                                                                                                    
MS.  CAMPBELL  said it  can  be,  although  it is  certainly  much                                                              
riskier to  take a term  policy.  "Sometimes  there's term  to 65,                                                              
term to 95, you know, some of those  that may be more likely," she                                                              
explained.   "But it is  riskier, and  the investors need  to know                                                              
Number 0301                                                                                                                     
REPRESENTATIVE GREEN put forward the following scenario:                                                                        
     I bought a policy 30 years ago,  and at that time, I was                                                                   
     going to  live 45 years or whatever  it was.  And  so my                                                                   
     cash value is  growing through a whole life  policy, but                                                                   
     it's  still going  to be way  below 50  percent at  this                                                                   
     time.   And yet,  if suddenly  I become terminally  ill,                                                                   
     ...  did I hear  you say  that the  settlement could  be                                                                   
     well  above that,  which  would put  it  above the  cash                                                                   
MS. CAMPBELL said yes, it could potentially  be quite a bit higher                                                              
than  the cash value,  but  it would depend  on the  state of  the                                                              
illness.   "Certainly, if  you're healthy  and you're doing  that,                                                              
... it's very  unlikely that you'll get something  higher than the                                                              
cash value," she concluded.                                                                                                     
REPRESENTATIVE GREEN  responded, "But  now, instead of  another 30                                                              
years  to go,  I'm  down to  three  months; so,  in  that case,  I                                                              
should."    He returned  attention  to  the tax  consequences  and                                                              
asked, "If  I, or  someone who  buys this policy, gets  the amount                                                              
settled,  that's not  subject  to tax?   What  about  in a  normal                                                              
policy I die.  Is the total not subject to tax?"                                                                                
MS. CAMPBELL  answered that  the death benefit  paid under  a life                                                              
insurance policy is not taxable.                                                                                                
Number 0386                                                                                                                     
REPRESENTATIVE GREEN  continued, "I buy  a policy for  whole life.                                                              
I take a discounted  amount.  It's purchased by  someone else. ...                                                              
Does  that   settlement   that  I've  taken   negate  any   future                                                              
consequences of the policy?"                                                                                                    
REPRESENTATIVE  ROKEBERG  responded,  "You  aren't on  the  policy                                                              
REPRESENTATIVE GREEN  stated his understanding that  the policy is                                                              
gone, then, when the settlement is made, and it is not taxable.                                                                 
Number 0405                                                                                                                     
BOB  LOHR,   Director,  Division   of  Insurance,  Department   of                                                              
Community  & Economic  Development, spoke  up via  teleconference,                                                              
offering  a  partial answer.    He  referred  to a  Federal  Trade                                                              
Commission (FTC)  pamphlet on viaticals.   He pointed out  that it                                                              
says, under financial implications,  "If you sell your policy to a                                                              
viatical  settlement company,  you may owe  federal capital  gains                                                              
tax on  the difference  between the  payment you  receive and  the                                                              
amount you've paid in premiums.  You may also owe state tax."                                                                   
REPRESENTATIVE GREEN  said the insured is the one  who is possibly                                                              
subject to capital gains, then.                                                                                                 
MR. LOHR concurred.                                                                                                             
Number 0447                                                                                                                     
CHAIRMAN KOTT  referred to  page 2, subsection  (b), of  the bill,                                                              
where it says  the provider, representative or  broker must, among                                                              
other things,  submit information  required by  the director.   He                                                              
asked Ms. Campbell  what she foresees that information  to entail.                                                              
He noted that  it is under AS  21.06, relating to the  Division of                                                              
MS.  CAMPBELL answered  that  the  NAIC has  fairly  comprehensive                                                              
model  regulations and  legislation on  viatical settlements,  and                                                              
the  intent  was to  follow  their  format for  regulating  these.                                                              
Examples  of  reporting include  the  date  of the  contract,  the                                                              
amount of  the death  benefit, the amount  paid for the  policies,                                                              
what  the source  was,  whether  the  coverage was  individual  or                                                              
group,  whether  it  was within  the  contestability  period,  the                                                              
diagnosis code, and  funding.  All of the information  relating to                                                              
the contract  would have  to be  reported on  a regular  basis "so                                                              
that you could monitor the market."                                                                                             
CHAIRMAN KOTT  referred to  subsection (d),  which read,  in part:                                                              
"The  director   may  examine   a  licensed  viatical   settlement                                                              
provider,  representative,  or  broker,  or  an  applicant  for  a                                                              
viatical settlement  provider, representative or  broker license."                                                              
Noting that  the examination  cost is being  passed along  to that                                                              
individual,  he asked,  "What would  prompt you  to examine  their                                                              
MS. CAMPBELL suggested an examination  could possibly be generated                                                              
based on the  reports provided, for example, if there  is any sign                                                              
that unusual  transactions are  taking place,  that too  little is                                                              
being paid for a contract, or that  there are an unusual number of                                                              
certain types of contracts that raise concerns.                                                                                 
CHAIRMAN KOTT  asked whether it  would require a  single complaint                                                              
or several, to the DBSC, to prompt an audit of the books.                                                                       
MR. LOHR  suggested Mr.  Usera would be  a better source  on that.                                                              
Referring  to the  bottom of  page 1,  he said he  believes  a so-                                                              
called bright line  sentence is designed to keep  his own division                                                              
on the side of  looking at the viator and the  viatical settlement                                                              
provider; "securities"  would take  over thereafter, and  he can't                                                              
speak to  their threshold with respect  to a complaint.   Mr. Lohr                                                              
offered,  however, to  provide  more information  on  the kind  of                                                              
examinations  the Division of  Insurance would  do and  what would                                                              
trigger them.                                                                                                                   
CHAIRMAN  KOTT requested  confirmation that  the director  in this                                                              
section of the bill is the director  of the Division of Insurance.                                                              
AN UNIDENTIFIED SPEAKER affirmed that.                                                                                          
Number 0515                                                                                                                     
MR. USERA  explained that  if a complaint  came to the  DBSC, they                                                              
would  investigate   it.    In  addition,  they   would  pass  the                                                              
information  on to the  Division  of Insurance  that the DBSC  was                                                              
investigating the complaint.                                                                                                    
MR. LOHR  responded that  likewise, his  division would  share all                                                              
information with the  DBSC.  Typically, the Division  of Insurance                                                              
does two kinds  of investigations of companies.   First would be a                                                              
financial  examination  if there  is  any question  regarding  the                                                              
company's solvency  or financial  fitness.  The  other would  be a                                                              
market  conduct  examination where  there  is reason  to  believe,                                                              
based  on  consumer  complaints,  that  there is  a  problem;  the                                                              
division would look at the company's  claims practices and analyze                                                              
how  they handle  their  business.   It is  quite  typical of  the                                                              
insurance  industry to  conduct those types  of examinations,  Mr.                                                              
Lohr pointed out.   For companies located within  Alaska, there is                                                              
a  regular   cycle  of  examinations.     For  companies   located                                                              
elsewhere, the division coordinates  activities with the states in                                                              
which the  companies are domesticated  - where they are  located -                                                              
to avoid duplication.                                                                                                           
Number 0673                                                                                                                     
CHAIRMAN  KOTT asked  if there would  be a  circumstance in  which                                                              
both the  DBSC and the  Division of Insurance  are looking  at the                                                              
same viatical provider.                                                                                                         
MR. LOHR replied:                                                                                                               
     I believe  that could  be the case  with - exactly  your                                                                   
     point - the viatical settlement  provider in the middle,                                                                   
     because  when they're  facing the insurance  end of  the                                                                   
     transaction, we regulate them.   When they're facing the                                                                   
     investment  side  of  the transaction,  I  believe  it's                                                                   
     regulated by  "securities," and it could be  one and the                                                                   
     same person or the same firm.                                                                                              
MR. USERA  agreed there  could be  instances where both  divisions                                                              
would be  concerned.  He  added, "As I  told you before,  this one                                                              
outfit  was  not  only cheating  the  investor  but  cheating  the                                                              
insureds.  That would be a concern to both divisions."                                                                          
CHAIRMAN KOTT  asked:   If there are  two entities reviewing  this                                                              
particular service provider, would  that individual or provider be                                                              
subject to two different penalties under the law?                                                                               
MR. USERA  answered, "It's possible.   I would think that  if this                                                              
comes up, we  would put our heads together and  not duplicate each                                                              
other's efforts, for one."                                                                                                      
MR. LOHR added:                                                                                                                 
     Absolutely.   One advantage of having both  divisions in                                                                   
     the  same branch  of government  - the DCED  - would  be                                                                   
     that we  would coordinate very  closely.  And  Mr. Elder                                                                   
     and I have agreed on that already.                                                                                         
Number 0745                                                                                                                     
REPRESENTATIVE  GREEN pointed  out that  some insurance  companies                                                              
may   require  substantial   investigation,   plus   there  is   a                                                              
possibility of litigation.   The fiscal note could  get large in a                                                              
MR. USERA  agreed there is always  the risk of litigation,  but it                                                              
would  be no  more  than  exists  now for  the  division.   As  an                                                              
example, when  they took  the company  mentioned earlier  to task,                                                              
the company sued.   Mr. Usera explained, "We negotiated  out for a                                                              
$10,000 payment  to us, and it was  no cost.  Generally,  we won't                                                              
issue  an order  unless we've  (indisc.--simult.  speech) got  the                                                              
book on them."                                                                                                                  
Number 0803                                                                                                                     
REPRESENTATIVE JAMES  asked if this  occurs over the  Internet and                                                              
if any provision in the division's  regulations ensures that these                                                              
kinds of activities aren't done improperly there as well.                                                                       
MR. USERA  indicated  he would expect  there to  be some  improper                                                              
dealings on the Internet; however,  that is against the division's                                                              
rules already,  although they have  nothing specific  to viaticals                                                              
on the Internet.                                                                                                                
Number 0873                                                                                                                     
REPRESENTATIVE ROKEBERG expressed  his understanding that 12 or 13                                                              
viatical  settlement  providers operate  in  the  country who  are                                                              
members of the National Viatical Association.                                                                                   
MR.  USERA said  there  are  others.   For  example,  some buy  up                                                              
insurance  policies  and  sell  them  to  their  parent  insurance                                                              
company as the investor; those aren't as widely known.                                                                          
REPRESENTATIVE ROKEBERG  suggested if someone is  operating on the                                                              
Internet  and  in  Alaska,  and   is  a  member  of  the  national                                                              
association, that person would register  to do business in Alaska.                                                              
MR. USERA  added, "We  have several  networks  that we belong  to.                                                              
People that  notice something on  the Internet, they will  tell us                                                              
if it's aimed at Alaska."                                                                                                       
REPRESENTATIVE ROKEBERG  said because of interstate  commerce, one                                                              
question  is the  state's  ability  to regulate  that.   Having  a                                                              
regulatory  scheme   in  place  forces  legitimate   providers  to                                                              
register  with  the  state,  meet  the  regulations  and  pay  the                                                              
licensure fees.                                                                                                                 
Number 0940                                                                                                                     
CHAIRMAN KOTT noted the arrival of Representative Murkowski.                                                                    
CHAIRMAN GREEN  asked whether, from  the states that  have adopted                                                              
such a law,  there is any idea  of the numbers, volumes  or values                                                              
of  the  portfolios  that  would   be  subject  to  this  type  of                                                              
MR.  USERA noted  that in  Alaska the  total has  been about  $1.5                                                              
million.  The  company that sold that $1.5 million  in face-amount                                                              
policies to  the investors told the  DBSC they had  sold something                                                              
like $254  million.   That is  one company,  he emphasized,  which                                                              
isn't even the biggest provider.                                                                                                
Number 1030                                                                                                                     
REPRESENTATIVE  CROFT asked  whether  there has  been any  circuit                                                              
court case disagreeing with Life Partners.                                                                                    
MR. USERA  answered, "No.   We would  have gotten  one up  here if                                                              
we'd continued  with litigation."   Asked the reason for  that, he                                                              
stated,  "The  SEC  [Securities   and  Exchange  Commission]  just                                                              
decided they didn't want to tackle it anymore.  I don't know."                                                                  
REPRESENTATIVE CROFT  asked whether there was ever  a petition for                                                              
MR. USERA replied, "No, they dropped it."                                                                                       
Number 1053                                                                                                                     
REPRESENTATIVE ROKEBERG  noted that the  NAIC and counsel  for the                                                              
viatical  settlement   association  had  testified   at  the  HL&C                                                              
Committee  hearing  two weeks  before.    This has  been  actively                                                              
debated, including jurisdiction within  state governments, privacy                                                              
issues,  and  whether  it  should   be  statutory  or  regulatory;                                                              
nationwide,  one could  flip a  coin.   He requested  confirmation                                                              
that  the most  recently  adopted statutory  scheme  is in  Maine,                                                              
where they "went the security route."                                                                                           
MR. USERA affirmed  that, adding, "They practically put  it out of                                                              
business, but it's just very onerous legislation."                                                                              
REPRESENTATIVE  ROKEBERG  said this  is  a  huge dilemma  with  no                                                              
simple answer, and because of crossover,  it is hard to know where                                                              
jurisdiction begins  and ends.  He  concluded, "That's why  we try                                                              
to be  as clear  as possible and  as flexible  as possible  in the                                                              
bill, rather than  being specific.  Give ... both  those divisions                                                              
the ability  to come to  grips with this  issue so we  can proceed                                                              
Number 1147                                                                                                                     
REPRESENTATIVE   GREEN  asked  if   the  divisions   believe  dual                                                              
jurisdiction truly  improves the ability  to reduce the  number of                                                              
fraudulent claims.   He  also asked if  they believe  one division                                                              
could do it for less cost, perhaps.                                                                                             
MR.  USERA  indicated  neither  the   DBSC  nor  the  Division  of                                                              
Insurance  could  do the  entire  job  alone, because  neither  is                                                              
geared to  do the  other's job.   "I think together  we can  do an                                                              
adequate job of policing the situation," he added.                                                                              
MR. LOHR  agreed  neither could  do it  alone.  He  said the  D.C.                                                              
Circuit's answer,  from a social perspective, was  wrong, although                                                              
he can't  speak to legal  aspects.  The  notion that no  one would                                                              
regulate  viaticals is  simply  not the  right  answer because  of                                                              
significant  potential for  abuse without  regulation by  someone.                                                              
He acknowledged that  whenever more than one regulatory  agency is                                                              
involved, it is  risky.  However, the divisions should  be held to                                                              
their pledge  to cooperate  closely with each  other, and  to make                                                              
sure there is neither overlap between  jurisdictional schemes - in                                                              
regulation or  practice - nor a  gap in the middle,  where someone                                                              
might be able to operate in some unregulated fashion.                                                                           
Number 1234                                                                                                                     
REPRESENTATIVE  GREEN  returned  attention  to  the  fiscal  note,                                                              
asking whether Mr.  Lohr or Ms. Campbell believes  passage of this                                                              
would create more  work and therefore would cost  more, or whether                                                              
the division could handle it within its existing budget.                                                                        
MR. LOHR answered:                                                                                                              
     Representative  Rokeberg  has  been most  persuasive  on                                                                   
     this point, and  I do believe that the zero  fiscal note                                                                   
     is accurate in  the sense that it is a net  zero for us.                                                                   
     That is,  we believe that we  will be able to  cover the                                                                   
     cost  of viatical  regulation  with the  fees  generated                                                                   
     from  it;  so it  would  be  a net  zero  for us.    And                                                                   
     normally when fees authority  is granted, as it would be                                                                   
     in this  bill - and  then to be  further fleshed  out by                                                                   
     regulation -  the statutory limit  on those fees  is the                                                                   
     amount necessary  to cover the  actual related  costs of                                                                   
     regulation.  And because of  the existing authority with                                                                   
     respect  to  specific  examinations  -  whereas  it  was                                                                   
     indicated  earlier there  might be  significant costs  -                                                                   
     those would be subject to direct  going to the companies                                                                   
     involved.   And on that basis,  I believe a net  zero is                                                                   
     an  accurate  estimate  of  the  fiscal  impact  on  the                                                                   
Number 1307                                                                                                                     
REPRESENTATIVE  GREEN   pointed  out  the  difference,   when  the                                                              
legislature  looks  at  fiscal  notes,   between  those  that  are                                                              
revenue-neutral and  those that cost a  lot but generate  a lot of                                                              
income; the latter would still be  a zero amount, but would have a                                                              
significant impact  on the  way the budget  is handled.   He asked                                                              
whether  either Mr.  Lohr or  Mr. Usera  has a feel  for how  much                                                              
income and expense would be involved.                                                                                           
MR. LOHR answered:                                                                                                              
     On the  insurance end, I  believe ... the  gross revenue                                                                   
     from  viatical  licensing would  be  de minimis.    We'd                                                                   
     probably  be talking  ten or  less  licensees, at  least                                                                   
     initially.  And we'd be talking,  initially, a part-time                                                                   
     clerk, which  we believe we  could absorb from  existing                                                                   
     resources; it  would not amount to anything  approaching                                                                   
     a  full-time  person.   And  whatever demand  there  was                                                                   
     would taper  off once the  initial wave of  applications                                                                   
     was   received.      Concerning    the   authority   for                                                                   
     investigation,  that  is existing  statutory  authority.                                                                   
     Therefore,  I  don't  believe it's  implicated  by  this                                                                   
     particular bill.                                                                                                           
Number 1373                                                                                                                     
CHAIRMAN KOTT asked Mr. Lohr whether  the provider, representative                                                              
or  broker  would apply  to  the  Division  of Insurance  for  the                                                              
license and then not be subject to occupational licensing.                                                                      
MR. LOHR said that is correct, to  his understanding.  The license                                                              
would  be just  like  what Linda  Brunette,  the  chief of  DCED's                                                              
licensing  section, issues  to a  life insurance  sales person  or                                                              
anyone else engaged in the business of insurance.                                                                               
CHAIRMAN KOTT asked whether there  were others waiting to testify;                                                              
there was no response.                                                                                                          
Number 1425                                                                                                                     
REPRESENTATIVE  ROKEBERG suggested  that putting  in statute  that                                                              
the name of the viator - the insured  - should not be divulged may                                                              
make some  people rest easier  on the privacy issue,  particularly                                                              
as the bill  finds its way to  the House floor.  He  believes that                                                              
is one of the  key issues here that would provide  for consistency                                                              
between  the regulatory  schemes.   It  isn't a  settled issue  in                                                              
other states; however, it should  be a settled issue here, because                                                              
there are  other methods  by which the  investor can check  on the                                                              
quality  of the  investment.   Representative  Rokeberg  mentioned                                                              
testimony in the  HL&C Committee that the investor  could call the                                                              
insurance company  and ask  whether the  company has a  particular                                                              
policy, assigned by  number, but that the insurance  company would                                                              
be  prohibited  from  telling  the  name of  the  insured  to  the                                                              
investor.  Although  he believes those provisions will  be part of                                                              
the  regulations, Representative  Rokeberg  said  the question  is                                                              
whether, as a matter of public policy,  the statement should be in                                                              
the statute; that is a discussion he believes should happen.                                                                    
CHAIRMAN KOTT asked if Mr. Lohr or Mr. Usera wished to comment.                                                                 
MR.  LOHR  said he  believes  it  is a  legislative  policy  call.                                                              
However, if they  wished to make that call, he believes  page 2 of                                                              
the bill - beginning at line 16,  where subsection (e) starts - is                                                              
permissive  language with  respect to  the regulations  generally.                                                              
And (e)(2)  on line 20 could be  fleshed out with a  mandate about                                                              
what  regulations should  include regarding  privacy, rather  than                                                              
simply  saying standards  may be  established.   Guidance in  that                                                              
area, or a mandate  in that area, is something  the division would                                                              
Number 1622                                                                                                                     
CHAIRMAN KOTT  said that  was basically  the direction  he himself                                                              
was heading.  He  referred to page 2, line 16.   [The beginning of                                                              
subsection (e),  lines 16 and 17,  read:  "The director  may adopt                                                              
regulations to implement this section,  including standards for".]                                                              
Chairman Kott asked  whether changing "may" to  "shall" interferes                                                              
with any  of the other provisions  in paragraphs (1)  through (9),                                                              
or whether the division can live  with "shall" in all those areas.                                                              
MR. LOHR  answered that  the Office  of the  Attorney General  had                                                              
advised him  that "may" is preferable  to "shall" with  respect to                                                              
the  regulations  as a  whole,  based  on  a supreme  court  case,                                                              
Amerada  Hess  Pipeline  Corporation v.  Alaska  Public  Utilities                                                            
Commission.   He said  he cannot  speak to  the legal niceties  of                                                            
that  case.   He  then indicated  the division  certainly  doesn't                                                              
object to  a mandate with  respect to  privacy for viators  or the                                                              
Number 1691                                                                                                                     
REPRESENTATIVE MURKOWSKI  stated that the regulations  of the DBSC                                                              
address  the privacy  issue,  except  as may  be  required in  the                                                              
course  of conduct  of  the responsibilities  of  the Division  of                                                              
Insurance.   She indicated uncertainty  to what would  be required                                                              
in  the course  of  conduct of  the  responsibilities.   She  also                                                              
wondered if even that could be problematic.                                                                                     
MR.  USERA indicated  that he  was compelled  to put  in an  "easy                                                              
out," because  there may  be, in the  course of an  investigation,                                                              
the need to contact  a viator, but the investigative  files of the                                                              
Division of Insurance are completely confidential.                                                                              
REPRESENTATIVE  MURKOWSKI stated  that she  recognizes that  there                                                              
probably does have  to be an escape clause.   She recommended that                                                              
maybe they  say something about  the confidential nature  of those                                                              
investigative reports.                                                                                                          
MR. USERA agreed to putting that in there.                                                                                      
CHAIRMAN  KOTT  mentioned  that  his comfort  would  be  eased  by                                                              
ensuring that the name of the individual  would not be released to                                                              
the public.                                                                                                                     
MR. USERA  assured the committee  that it is absolutely  protected                                                              
by the Constitution of the State of Alaska.                                                                                     
Number 1841                                                                                                                     
REPRESENTATIVE ROKEBERG  emphasized that  it would be a  good idea                                                              
to add  a prohibition to  divulging the name  to an investor  or a                                                              
provider's broker  or agent.   He indicated that  it is up  to the                                                              
DBSC  to create  a  scheme  where there  is  some ability  of  the                                                              
investor to  check the veracity of  the actual existence  of that,                                                              
independent of the broker.                                                                                                      
CHAIRMAN  KOTT  asked if  there  was  any more  public  testimony;                                                              
seeing none, he closed public testimony.                                                                                        
REPRESENTATIVE  CROFT wondered if  Representative Rokeberg  wanted                                                              
the committee to hold HB 190 and add the provision.                                                                             
REPRESENTATIVE ROKEBERG  said that he doesn't think  the committee                                                              
needs to  hold the bill,  but they can  do a conceptual  amendment                                                              
that adds the provision to the bill.                                                                                            
REPRESENTATIVE  JAMES  asked  how  the Division  of  Insurance  is                                                              
informed of who the person is.  Somebody  has to know, she pointed                                                              
out,  and there  is that  chance,  if investigating  the case,  of                                                              
needing to contact  the person who is insured.   She indicated she                                                              
doesn't really have  any problem with what is  in the regulations,                                                              
and there  is already  a constitutional  requirement for  privacy.                                                              
She pointed out  that it seems there is no need  for the provision                                                              
unless they  think it is  politically correct and  can, therefore,                                                              
get more votes on the bill.                                                                                                     
REPRESENTATIVE  ROKEBERG stated that  it was not  his intent.   He                                                              
informed the  committee that the reason  for the issue is  that it                                                              
is currently  being debated by  the NAIC subcommittee  on viatical                                                              
settlements,  because there  has been  a tendency  to protect  the                                                              
viator or  the insured by  prohibiting the  release of his  or her                                                              
name.  He  explained that the issue  has to do with  allowing more                                                              
disclosure  of  the  name  so  the  investor  can  make  a  better                                                              
determination about the quality of the investment.                                                                              
REPRESENTATIVE  JAMES referred to  the scenario  where there  is a                                                              
direct relationship  between the  insured and  the "lender."   She                                                              
wondered, if  the provision  was added, if  it would  disallow the                                                              
knowledge between the investor and the person who is insured.                                                                   
REPRESENTATIVE  ROKEBERG  referred to  page 2,  line  20, of  CSHB
190(L&C),   where  it   states,   "viator   and  insured   privacy                                                              
protection,"  and  he  indicated   it  relates  to  the  insurance                                                              
company.   He explained  that the new  provision should go  in the                                                              
security  section, because  that is  where they  want to  prohibit                                                              
public  discourse about  the name  of the viator.   The  provision                                                              
should  be prohibiting  the people  regulated  by securities,  the                                                              
investors.   And those  people authorized  by  the provider  to do                                                              
marketing  should  be prohibited  from  knowing  the name  of  the                                                              
TAPE 00-6, SIDE A                                                                                                               
Number 0010                                                                                                                     
MR. USERA stated,  "I would have  no problem with that  as long as                                                              
you gave us some 'out,' so we don't  violate our own regulation by                                                              
doing our job;  similar to the language that's  in the regulations                                                              
would be entirely reasonable."                                                                                                  
Number 0055                                                                                                                     
REPRESENTATIVE CROFT  referred to the privacy issue  and indicated                                                              
that the provision added in 1972  in the Constitution of the State                                                              
of  Alaska  states,  "The  right  of  the  people  to  privacy  is                                                              
recognized  and shall  not be  infringed.   The legislature  shall                                                              
implement this section."  He pointed  out that the best reading of                                                              
it probably  is that  the privacy clause  requires that  the items                                                              
that have  been discussed be kept  confidential.  He  indicated it                                                              
really has  been the legislature's  duty to flesh out  the privacy                                                              
clause, which  they have  very rarely done.   He stressed  that if                                                              
the committee  wants  to give the  message in  CSHB 190(L&C)  that                                                              
certain  items will  not be disclosed,  then they  should say  it.                                                              
The privacy  clause is  a broad and  powerful one,  but it  is not                                                              
very  well  defined,   and  it  seems  to  contemplate   that  the                                                              
legislature will define it.                                                                                                     
MR.  LOHR said  the  general state  of the  law,  with respect  to                                                              
confidentiality and  the insurance statute, is not very  good.  He                                                              
explained  that  the  general  rule  [in  his  division]  is  that                                                              
documents  are releasable  unless he  finds they  need to be  kept                                                              
confidential, which  implicitly requires  a degree of  findings on                                                              
his part.   Furthermore,  it is only  for as  long as he  declares                                                              
that  they  need  to  be confidential.    It  is  a  weak  overall                                                              
confidentiality  provision, and he  suggests that they  not delete                                                              
reference  to specific  requirements  for  confidentiality on  the                                                              
side of the viator.                                                                                                             
REPRESENTATIVE GREEN agreed that  if there is a question, they had                                                              
better make sure it is perfectly clear.                                                                                         
REPRESENTATIVE JAMES agreed that  it certainly doesn't hurt to put                                                              
it in with regard  to the people who are involved  in the business                                                              
and for the investor.  She expressed  concern about the people who                                                              
the insured  might make  a deal with  outside of  the group.   She                                                              
assumes those  people can  never let anybody  know that  they have                                                              
purchased a  life insurance  policy from  someone else,  she said.                                                              
Representative James indicated that  even if it were carried as an                                                              
investment, it could not have the  name on it; and if it did, then                                                              
they would  be violating the privacy  issue.  She wondered  if the                                                              
language  in CSHB  190(L&C) extends  to people  who are  investors                                                              
directly with the insured.                                                                                                      
REPRESENTATIVE ROKEBERG indicated  people will not be permitted to                                                              
sell  their  own   life  insurance  policies.     He  agreed  with                                                              
Representative    Croft's    analysis   of    the    legislature's                                                              
constitutional authority.  He pointed  out that someone could make                                                              
the case that it isn't unquestionably  unconstitutional or that it                                                              
is  within the  privy of  the constitution,  but  he believes  the                                                              
legislature can  define what  they want done.   He commented  that                                                              
Mr.  Usera's  point is  well  taken  that  they can  prohibit  the                                                              
divulging of a  name to the marketing security side,  except as it                                                              
relates to their confidential investigative requirements.                                                                       
REPRESENTATIVE  KERTTULA  agreed  and offered  the  suggestion  of                                                              
adopting a provision that requires privacy protection.                                                                          
REPRESENTATIVE  CROFT indicated he  doesn't want  to do it  on the                                                              
fly, but maybe they could write it up and do it in a day or two.                                                                
Number 0587                                                                                                                     
CHAIRMAN  KOTT wondered if  it is  the will  of the committee  not                                                              
only to deal with the DBSC, to ensure  that the privacy protection                                                              
is adhered to, but also to address  the viatical service provider,                                                              
unless they are just after the state side of the equation.                                                                      
REPRESENTATIVE ROKEBERG said that it is the security side.                                                                      
CHAIRMAN KOTT  pointed out  that the provisions  of 3  AAC 08.750,                                                              
Chapter 08,  Securities, for  the DCED, state,  "except as  may be                                                              
required   in   the   course  of   conduct   of   the   division's                                                              
responsibility, a  viatical settlement provider or  issuer may not                                                              
divulge  to another  person  the name  of either  a  viator or  an                                                              
insured of any insurance policy that  is the subject of a viatical                                                              
settlement  interest." He  suggested that  would probably  clearly                                                              
identify the right-to-privacy issue,  which seems to be the intent                                                              
of the committee.                                                                                                               
REPRESENTATIVE MURKOWSKI  agreed that  they can include it  on the                                                              
security  side, but  suggested it  would be  advantageous to  also                                                              
include it on the Division of Insurance side.                                                                                   
Number 0704                                                                                                                     
MR.  LOHR concurred.    He indicated  covering  it explicitly  for                                                              
insurance closes the  door on any release of information  absent a                                                              
waiver by  the holders  of the confidentiality  interest;  if they                                                              
want to waive  the interest, they  have the right to do  that, and                                                              
it should not  be the government agencies that  are divulging that                                                              
CHAIRMAN  KOTT wondered  if it  is all  right if  the language  is                                                              
included in the body of the bill.                                                                                               
MR. USERA indicated he would have no problem with that.                                                                         
REPRESENTATIVE MURKOWSKI  asked whether  it would be  necessary or                                                              
recommended  to  include  some  language   in  that  section  that                                                              
discusses the confidential  nature of the investigation,  or if it                                                              
is  assumed   that  such  investigations   within  the   DCED  are                                                              
MR. USERA explained  that in other places in the  regulations, the                                                              
investigative files  are confidential.  There is  some question as                                                              
to  whether, once  an  enforcement action  has  been taken,  there                                                              
isn't the  cloak of confidentiality.   The approach to  this would                                                              
be to black out any names present in the files.                                                                                 
REPRESENTATIVE MURKOWSKI mentioned tightening it up.                                                                            
MR. USERA interjected that it wouldn't harm anything.                                                                           
REPRESENTATIVE  KERTTULA  recommended  that  it be  tightened  up,                                                              
because  the  division's  responsibilities  could  be  interpreted                                                              
broadly, and  once an investigation  file goes forward there  is a                                                              
legal issue as to whether at that point it is a public record.                                                                  
REPRESENTATIVE CROFT mentioned that  it might not address the idea                                                              
of waiver.   He  pointed out that  it may  be in the  individual's                                                              
interest  to  get his  or  her named  published,  and  individuals                                                              
should have that option.                                                                                                        
CHAIRMAN KOTT  wondered if that would  fall within the  purview of                                                              
the DBSC or the Division of Insurance.                                                                                          
REPRESENTATIVE CROFT said he didn't know.                                                                                       
Number 0913                                                                                                                     
TERRY  ELDER,   Director,  Division   of  Banking,   Securities  &                                                              
Corporations,  Department  of  Commerce  &  Economic  Development,                                                              
commented  that  HB   83,  passed  in  the  last   session,  makes                                                              
investigative  files confidential,  subject  to administrative  or                                                              
judicial actions.   He  noted that  in the past  it was  not clear                                                              
whether  the  investigative  files   were  confidential  after  an                                                              
administrative order was issued.   The administrative order itself                                                              
is public,  although it  has always been  their position  that the                                                              
investigation files themselves are confidential.                                                                                
REPRESENTATIVE KERTTULA  wondered if the  only way for  the public                                                              
to get  the names is through  an administrative or  judicial order                                                              
after the complaint has been filed.                                                                                             
MR.  ELDER  said  it  is  very  possible  that  the  investigation                                                              
wouldn't require the names; therefore,  they wouldn't be a part of                                                              
the  record,  and  it  wouldn't  be an  issue.    If  somehow  the                                                              
information were  part of their files  and a member of  the public                                                              
wanted access  to that, the person  would have to go  through some                                                              
administrative or judicial procedure.                                                                                           
REPRESENTATIVE KERTTULA wondered  if that is after a complaint has                                                              
been filed.                                                                                                                     
MR. ELDER  said that  is correct.   Those investigation  files are                                                              
confidential all the time.                                                                                                      
REPRESENTATIVE  KERTTULA  indicated  concern  about what  kind  of                                                              
information  the buyer is  going to  get.   The original  bill had                                                              
language that she liked about the  fact that the prospective buyer                                                              
had to  get information  that was sufficient  to make  an informed                                                              
investment  decision.    The  new language  says  they  may  adopt                                                              
regulations but doesn't  have language that is  quite as specific.                                                              
She added  that she would  like to see  a provision  that requires                                                              
that, not just allow it to be done by regulation.                                                                               
Number 1176                                                                                                                     
REPRESENTATIVE   ROKEBERG   noted  that   the   approach  of   the                                                              
legislation  was basically  to go  to a  regulatory scheme  rather                                                              
than a statutory scheme.                                                                                                        
CHAIRMAN  KOTT   asked  whether   the  sponsor  would   object  to                                                              
reinserting that original language.                                                                                             
REPRESENTATIVE  ROKEBERG agreed  with  both points  brought up  by                                                              
Representative Kerttula, saying he  therefore does not object.  He                                                              
indicated if the  committee did not want to pass  out the bill but                                                              
instead add the new language, he  would not object to that either.                                                              
CHAIRMAN KOTT  emphasized that if  they want to  affirm something,                                                              
they should  place it  in statute.   He announced the  committee's                                                              
intent to direct  staff to work with the DBSC and  the Division of                                                              
Insurance, and  also to reinsert the language  that Representative                                                              
Kerttula had suggested.  [HB 190 was held over.]                                                                                

Document Name Date/Time Subjects