The North American Securities Administrators Association is warning investors about some of the claims of made by viatical firms, citing deceptive marketing practices and numerous instances of fraud.

Targeted at U.S. investors, state securities regulators warned that investors should not be misled by claims that viatical settlements offer safe, guaranteed returns like certificates of deposit. The warning came as the Subcommittee on Oversight and Investigations of the House Financial Services Committee held a hearing on viatical investments.

Securities regulators from 21 states report bringing actions on behalf of investors who were defrauded of more than US$400 million over the past three years. State regulators pointed to low interest rates and aggressive marketing as fueling a rise in viatical contract sales. In many cases, independent insurance agents have been recruited to sell viaticals, according to regulators.

“Viaticals contracts are legitimate products, but state securities regulators have two concerns,” says Joseph Borg, president of the NASAA and director of the Alabama Securities Commission. “First, we’re concerned that the inherent risk of viatical investments — gambling on when someone will die — aren’t being adequately disclosed, and second, many investors have been outright defrauded by some viatical companies or their sales agents.”

“There’s an old saying, ‘The only sure things in life are death and taxes’ and viatical salesmen play on that,” said Denise Voigt Crawford, Texas securities commissioner. “They tell investors that because death is a sure thing, viaticals are too. But the only sure thing with viaticals are the large commissions some brokers get, making it even tougher for investors to get the returns they’re promised.”

In a new twist, viatical companies are selling investors large numbers of “senior settlements” — interests in the death benefits of healthy older people. While growth in the sales of traditional viaticals has been dramatic – the National Viatical Association recently estimated viatical brokers would purchase and resell over US$4 billion worth of life insurance policies in 2001, up from US$1 billion in 1999 – growth in the market for senior settlements could be even more dramatic. A 1999 study by the Conning Corporation, a Connecticut-based research and investment management firm, said the potential market for senior settlements could be “conservatively” estimated at over US$100 billion.

“The psychology of investing in viaticals is different than investing in other types of instruments, and people need to consider that going in,” said Bradley Skolnik, Indiana securities commissioner and chair of NASAA’s enforcement section. “The risk is high with viaticals, and investors need to ask themselves if the potential reward is worth the burden of hoping someone will die quickly so they can maximize their return.”