Legislature(1999 - 2000)
03/30/2000 02:40 PM L&C
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HB 190-VIATICAL SETTLEMENTS REPRESENTATIVE ROKEBERG, sponsor of HB 190, said he worked closely with the Division of Banking, Securities, and Corporations and the viatical settlement industry. Viatical forms of contracts are agreements by investors to purchase a discount on a life insurance policy. This particular style of insurance and investment came about because of the AIDS crisis several years ago. Some people with the disease had life insurance policies but were unable to access the value of them to help pay for their medical treatment. HB 190 allows anyone with an existing life insurance policy to sell to an investor who takes a risk on the remaining length of time of the life of the person against the discount paid for the policy. Number 149 REPRESENTATIVE ROKEBERG explained that this type of transaction is sometimes subject to fraud because there is no way to specifically regulate this type of activity in Alaska. There is concern about a turf war within our bureaucracy as this bill allows dual regulation by the Divisions of Insurance and Securities. Dual regulation is not uncommon in a number of business areas. There are $1.5 million worth of viatical contracts in Alaska. CHAIRMAN MACKIE asked if there is any known opposition to the bill. REPRESENTATIVE ROKEBERG answered no. There were some concerns about the jurisdiction, which were dealt with in the House Judiciary Committee. CHAIRMAN MACKIE asked what the House vote was. REPRESENTATIVE ROKEBERG said it was unanimous. Number 346 MR. TERRY ELDER, Director, Division of Banking, Securities, and Corporations, testified that a majority of states have already adopted statutes that are similar to the insurance provision of this bill. Their insurance department regulates the relationship between people who are selling their insurance products and the middle people who are buying and selling them to investors. About 44 states take the position that viaticals, when they are sold to investors, are investment contracts and, therefore, covered under the Securities Act. Most states take the position that they have jurisdiction on the security side when that middle person turns around and sells it to investors. This bill codifies that. MR. ELDER said there are two benefits. On the insurance side it provides protection for the insurance company against fraud, which has taken place in other states. In this case, his Division asserts jurisdiction because they are investment contracts. However, when they do that, they would have to go to court if it was challenged and argue each case as an investment contract. Last year a lawsuit was filed blocking the Division's jurisdiction. Putting "viatical" in the definition of a security, which four other states have already done and several other states are in the process of doing, would benefit the State of Alaska because there would be no question of jurisdiction. CHAIRMAN MACKIE asked if the cost of those suits was substantial. MR. ELDER replied absolutely. SENATOR LEMAN said it doesn't make sense to prosecute people who may have been proceeding in good faith on the basis of what has been occurring in some other state. He supported clarifying the state's position, but he didn't know about past actions. He wasn't sure the state's position had been as clearly stated to the public as it was to the committee. MR. ELDER agreed that it wasn't clearly stated. Viaticals aren't mentioned anywhere in Alaska statutes or regulations; so they would have to ask, as some companies did. This legislation is needed to clarify our statutes and to make it clear to the public that viaticals are a security. SENATOR LEMAN asked if we were prosecuting anyone who was operating in good faith or whether that has been resolved. MR. ELDER replied that everything has been resolved. Only one order was issued against a company, not an agent. SENATOR KELLY asked if the middle people who buy the contracts package them in a portfolio and sell them to an investor like mortgage companies do. MR. ELDER explained that typically it's almost a one-on-one thing. Sometimes they will fractionalize it: they buy a $100,000 policy from someone and turn around and sell that policy to 10 people for $10,000 each. It's rare that they would be put in some kind of portfolio, although it probably could be done. SENATOR KELLY asked if the investment return depends on how long the person lived. MR. ELDER answered yes. That's one of the difficulties. The total return may be clear, but you may earn it next year or 40 years from now. It's hard to tell. One of the problems with no regulation is that an advertisement will say a 40 percent return is available and imply that's a lot larger than the five or six percent you can get from a CD, not mentioning the liquidity problem. MR. BOB LOHR, Director, Division of Insurance, said that the Division's position is that it is not seeking involvement in this area, but it is willing to become involved at the request of the legislature to assist and make sure there is complete coverage. The division believes someone ought to be regulating viatical settlements. The division came forward because last year, under a previous director, there was opposition to any involvement by the Division but it is not interested in any active "turf grab." SENATOR LEMAN moved to pass HB 190 from committee with individual recommendations. There were no objections and it was so ordered.