Life Settlements and Life Insurance Premium Finance
By Chris W. Kite

Our May 9th Market Connection featured Brian Casey, a partner in the Atlanta office of Lord, Bissell & Brook LLP. Mr. Casey provided insights on the legal and regulatory climate for the life settlement and life insurance premium finance markets. He reported on the Life Insurance Settlement Association’s (LISA) May 3rd meeting in New York and the National Association of Insurance Commissioners (NAIC) public hearing held the same day. The hearing addressed life insurance settlements, premium financing, insurable interest laws, stranger-owned life insurance, and disclosure issues.

Mr. Casey and his associate Scott Cipinko are also involved in representing the Life Insurance Finance Association (LIFA). Click on this link to read the LIFA press release regarding this important meeting in New York. (Read PDF)

Mr. Casey’s presentation on May 9th gave an overview of the history of the secondary life insurance market and related regulations. He showed a flow chart of the various constituents involved in the life settlement transaction process. These layers provide checks and balances and also affect the cost of a settlement option.

There is very little public data about this market. According to Mr. Casey, estimates for 2005 are from $5 to $9 billion in face amounts. Estimates for 2006 are for up to $14 billion in face amounts. The average policy size is $1.5 to $2 million. The average age is 74 to 80 with 6 to 10 years of life expectancy. Universal life is the typical life insurance product sold in a life settlement. The average settlement price is between 16% to 22% of the face amount. The trend may be to lower face amounts and insureds with fewer health impairments. A life settlement company reports that its average face amount is now below $1 million. We also hear that a company is planning a national campaign for life settlements.

How efficient will this market be in the future? How large will it be? What should be done to assure appropriate use of settlement options? I expect that in 10 to 20 years, large blocks of universal life products with lifetime guarantees will feed this market and require greater efficiency. These products are the top sellers over the last few years. Eventually, the market value of the policy is likely to be much greater than the cash value.

Regulators and insurance businesses seem united in seeking to stop investor-initiated practices that seem to go against insurable interest laws. The focus has been on non-recourse premium financing where the plan is to sell the policy after two years. Investors initiate the financing and settlement plan, attracted mainly by universal life lifetime guarantees that are aggressively priced for older ages. Investor owned policies can raise the specter of foul play to increase returns, but it’s unknown how likely a greedy investor would be to risk a murder charge compared to a greedy family member doing so. These investors are viewed as speculating in human lives, but the deals may be quite reasonable from a financial standpoint apart from the legal and political risks. Some deals are an attractive arbitrage between life insurance and life annuity rates that are fully guaranteed. Markets eventually find ways to exploit these mismatches.

Mr. Casey reviewed reasons for life settlements based on changes in the insurance needs for business, estate or protection goals. In these cases, a valid insurable interest existed at policy issue. Along with changing needs, the policy owner may eventually view the premium as too costly or the performance as below expectations.

In the Market Connection call we experimented with polling. The responses supported the view that the policy owner would want to know about the availability of a life settlement to provide additional value compared to lapsing or surrendering the policy. The responses also supported the view that the policy owner should be advised that the best option would often be to find a way to keep the policy. Arrangements for financing and liquidity needs could be made with family or financial institutions. This view was a key point of John Skar, Chief Actuary of Mass Mutual, who gave our January Market Connection call.

Even if you are not in the life settlements market, your business is likely to be affected by it. Also the dynamics involved relate to how we service life insurance policyholders. How do we help them adjust their plans with inevitable changes to needs and economics?