Could Stoli spread to Britain? City watchdog says the system stops insurance with strangers

A law from 1774 shuts off most of the angles for American-style abuses, finds James Moore

Sunday 17 February 2008 01:00
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Could it happen here? The "stranger originated life insurance" (Stoli) phenomenon – where senior citizens in the US have been targeted by the likes of hedge funds, which buy their life insurance and gamble on their untimely demise – promp-ted the City watchdog to conduct an inquiry in the UK.

The Financial Services Authority (FSA) said that it found little evidence of the practice but, significantly, added that it was not necessarily illegal.

"Our conclusion was that it would not be illegal in the UK as such," said a spokesman, "though it is certainly not in keeping with the traditional basis of life insurance, where the beneficiary is normally a close relative of the insured party.

"There was some evidence in the US – never proven – that some people might have been incentivised to hurry up the demise of insured parties in order to get payouts. Of course, that can happen with traditional life insurance."

However, experts say that the abuses committed by American companies engaging in "Stoli" would be harder to carry out here.

The laws governing insurance are different in the UK, so you cannot take out a policy on somebody else's life without them at least knowing about it.

Nick Kirwan, from the Association of British Insurers, commented: "In the UK, we have an old insurance law dating back to 1774 which says that you are not allowed to take out a policy on someone else's life. There has to be an insurable interest."

So, for example, an employer can take out a life policy on a vital member of staff – known as "key man insurance" – to compensate it in the event of that member's death.

But it does not allow a complete stranger to take a policy out on an individual.

"Before the law, there were abuses. You might have had a general whose troops had taken out policies on his life. You can see the effect this might have had on their aim if he was in front of them," Mr Kirwan added.

However, it is not illegal to sell a policy to a third party who could then benefit from the seller's death. Theoretically, as has happened in the US, you could also be paid to take out a policy on yourself, which you could agree to sell on later.

The sale of existing life policies is relatively common in the US.

If a policyholder contracts a terminal illness, for example, they often sell the policy on so they can make use of the money before they die.

In the UK, this has never been a big issue because most British life insurance policies pay out straight away if you become terminally ill.

The final, perhaps crucial, difference that would prevent Stoli catching on in the UK is the way in which the FSA operates.

In the US, the system tends to operate on the basis of clear rules. Here, the FSA uses a "principles-based model", allowing the regulator to act if it feels principles such as "treating your customer fairly" are being violated.

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