If it walks like a STOLI and talks like a STOLI …

The Florida Office of Insurance Regulation looked at third-party, or “stranger-originated life insurance” in some detail before faced with the Pasco County offer. The OIR researched the issue in-depth in 2010 — even holding a public hearing in August that year. Stranger-originated life insurance policies, shorthanded in the industry as STOLIs, had come onto regulators’ radar all over the country a few years earlier, when insurance companies had noticed a decided increase in the number of STOLIs being sold.

By 2010, STOLIs had the attention of law enforcement as well. In April, a Florida insurance broker was charged with 22 counts of grand theft, fraud and other financial crimes linked to policies worth about $78 million. (He eventually pleaded guilty.) The STOLIs themselves were not illegal or fraudulent; there were “irregularities” on the application forms.

When insurance companies and regulators started to look at why so many STOLIs were being sold, they realized that hedge funds were buying up the policies. They were buying these policies in bulk, in fact — if this isn’t sounding familiar, please see our June 27 post about the offer to Pasco County.

Court records explained the Florida broker’s approach. He convinced his customers, elderly men and women, that they could make some extra cash by taking out life insurance policies and selling them to investors. In two years, the broker promised, the policy would sell on the secondary market. The insured senior would then receive between 3 percent and 5 percent of the face value of the policy. They had to wait two years, he explained, because after two years the insurance company could not contest the policy.

In some cases, the senior received cash up front. In others, the senior received nothing, ever.

This broker was not the only guy in the country selling STOLIs to elderly victims, of course, and that’s why the OIR decided to hold the hearing in August 2010. The testimony given there was then combined with other research into a final report.

The report made a point of saying that, while these schemes looked like victimless crimes — on the surface, it looked as if everyone profited — they were not. Seniors suffered as a result.

We’ll talk about that more in our next post.

Sources: 

Wall Street Journal, “Regulators Rein In Murky Life Policies,” Leslie Scism, June 21, 2010

Florida Office of Insurance Regulation, “Stranger-Originated Life Insurance (“Stoli”) and the Use of Fraudulent Activity to Circumvent the Intent of Florida’s Insurable Interest Law,” January 2009

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