continues to go from strength to strength despite concerted efforts
by insurers and regulators to curb its growth. Signaling that the
life settlements are here to stay, a growing number of life
insurers are themselves entering the market as serious players.
Charles Davis reports.
US insurers have long criticised the booming life settlements
business, frustrated by their inability to counter the increasingly
popular offerings from interlopers, large and small.
Go deeper with GlobalData
For several years now, the industry has been flummoxed by life
settlements. On the face of it, they can jeopardise profits that
for years have been easily reaped from lapsing policyholders. As
the life settlements market has grown, the opportunity has proven
too potentially lucrative to be ignored. So, even as the market
overall remains critical of what it calls stranger-initiated life
insurance, a number of players are starting to join the game.
Those who have joined the settlements business would argue they had
little choice. Before the life settlements market began to grow,
customers who no longer wanted coverage either stopped paying the
premiums or sold their policies back to their insurers for a
fraction of the potential death benefits – creating the
all-important cash surrender value that has padded many an
insurers’ bottom line. Insurers have long banked on not having to
pay on a certain percentage of their policies. Life settlements eat
into those profits.
Insurer American International Group took the leap a few years ago,
and is now one of the biggest buyers of life settlements, snapping
up policies with a face value of $1.1 billion since October 2001.
It isn’t alone. Bermuda-based reinsurer Axis Capital Holdings
recently purchased a $400 million life settlements block.
Chicago-based insurer CNA Financial has $108 million invested in
life settlements.
The latest insurer entrants to the life settlements market cite the
same potential profits for their decision to join rather than
fight. Phoenix Companies (Phoenix) recently announced it is
entering the life settlement market, working through four brokerage
general agencies to offer settlements on policies with a face value
of $500,000 or more – even some of its own policies.
Phoenix Life Solutions will work with Advanced Planning Services,
American Brokerage Services, Ash Brokerage and Madison Brokerage to
originate life settlements, or buy unneeded life insurance policies
from policy owners in return for an immediate cash settlement,
Phoenix said.
“We established Phoenix Life Solutions with an emphasis on
integrity, transparency and efficiency in the settlement
origination business so individuals who settle policies with us
know they are getting a fair settlement offer, and investors know
the underlying policies in their portfolios were settled properly,”
Dona Young, chairman, president and chief executive officer of
Phoenix, said in a statement.
Phoenix is being careful to avoid the sales practices that have
generated criticism from regulators and other insurers. Phoenix
will base fees only on the amount of a settlement that exceeds the
cash surrender value of the policy. Phoenix Life Solutions will get
5 percent of that. The brokerage general agencies get 20 percent,
passing on some to the agent or adviser who brought in the
client.
Phoenix is not the only insurer joining the life settlements
market. A unit of Genworth Financial in December 2007 agreed to
become a minority shareholder in Institutional Life Services, a
joint venture of investment bank Goldman Sachs Group and National
Financial Partners that was expected to launch at end of the first
quarter of 2008. Announced in September 2007 by National Financial
Partners, an independent distributor of financial services products
to high-net-worth individuals, and Goldman Sachs, Institutional
Life Services was to create a “leading investment marketplace” for
the settlement of life insurance polices.
Other insurers are developing alternatives to life settlements. One
emerging alternative may be life insurer loan programmes in which
the policyholder still owns the policy and the insurer makes money
on the interest.
New York Life (NYL) is among the first to offer loans. Through its
Access Plus programme, the insurer can provide a policyholder with
access to cash, in excess of the policy’s cash value, while
preserving a death benefit and retaining policy
ownership.
To be eligible, medical evidence of current health must be
provided and, in general, the insured’s life expectancy must be
more than one year but less than 10 years. If a policyholder
qualifies, NYL is able to offer to pay the future required premiums
and, given specifics of the case, may be able to offer an up-front
lump sum of cash greater than the policy’s cash value, a
spokesperson said. In return, NYL will reduce the death benefit to
pay off the loan when the insured dies.
Legacy Funding Group has begun offering a similar product,
LegacyLoan, which allows policyholders to maintain ownership of
their policies while the company funds all premiums. No collateral
is needed, as the collateral is a pledge of 90 percent of the
policy’s death benefit. Upon death, the benefit is used to pay off
the loan and accrued interest. The balance beneficiaries will
receive can never be less than 10 percent of the
benefit.
The key difference in the life insurance loan programme is that the
policy ownership does not change, the beneficiary receives the
death benefit net of the outstanding loan, and the policyholder can
undo the transaction simply by repaying the loan and
interest.
While life settlements are a legitimate business, much of the
mainstream US insurance market remains concerned about
stranger-originated or stranger-initiated policies that end up in
the settlement market.
Undeterred by the emergence of insurer-owned life settlement
products, the insurance industry continues to fight back, lobbying
regulators to crack down on what it thinks are predatory or
outright fraudulent practices. So far North Dakota and a few other
states have enacted rules to make it more difficult to generate
such policies. The debate won’t end anytime soon, especially if
more insurers decide to join the party.
