counter pressure from the life settlements industry
The rampant growth of the US life settlements market has US
insurers mulling a response in the form of policy loans on life
insurance contracts.
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Life insurers, industry regulators and trade associations are all
actively considering the adoption of a framework for policy loan
programmes, an idea unthinkable a few years ago, before the rise of
viatical settlements. Regulators have begun the technical work
necessary for consideration of a model that would offer guidance on
policy loan programmes after a motion to begin looking in to policy
loans passed unanimously during a conference call of the Life
Insurance and Annuities A Committee of the National Association of
Insurance Commissioners (NAIC).
The NAIC’s decision came in response to news that an unnamed
insurer notified insurance regulators in Kansas of its intention to
implement a policy loan programme. The programme would allow
in-force policy owners, who meet certain underwriting criteria, to
borrow against the death benefit of a policy.
Policy loans would offer important advantages over viatical
settlements. First, the policy owner would receive similar, if not
identical, benefits offered by a life settlement company. Second,
the policy owner continues to remain the owner of the contract and
does not relinquish any rights under the contract. Upon the death
of the insured, any death benefit in excess of the policy loan
amount is still paid to the beneficiary, and all insurable interest
would remain in effect.
The problem is that under Kansas law and the laws of most states,
insurers cannot offer a loan that exceeds the policy’s cash
surrender value, so the development of a policy loan model would
require legislative adoption if and when the industry can agree on
an approach.
The NAIC, therefore, agreed to have its Life and Health Actuarial
Task Force review its reserving and underwriting standards with an
eye to making recommendations about the feasibility of developing
such a model. Regulators discussed the possibilities of developing
a model for policy loan programmes during a discussion at the
NAIC’s meeting in Kansas City in September, expressing willingness
to weigh the pros and cons while maintaining a certain amount of
scepticism.
Industry body the American Council of Life Insurers (ACLI) followed
the discussion with a statement expressing interest in learning
more about the details of the proposal. “Consumers can only benefit
from creative new ideas such as this one to address needs in the
marketplace,” the ACLI said.
The debate over investor-owned life insurance has intensified in
the past year as the once-marginal life settlements industry has
grown rapidly. In life settlements – also known as senior
settlements or investor-owned life insurance – policyholders over
age 65 sell their life insurance policies to a third party for more
than the cash surrender value, but less than the net death benefit.
The life settlement company pays the remaining premiums, but
pockets the death benefit when the policyholder dies.
The market is an outgrowth of viatical settlements, which developed
in the 1980s as a way to provide terminally ill HIV-AIDS patients
with cash to pay for medical care.
Viatical settlements involve an insured person who is terminally
ill with a life expectancy of less than two years, while life
settlements involve older individuals with life expectancies of
more than two years.
Fuelled by capital provided by banks, hedge funds, pensions and
other institutional investors, the life settlement market is
booming, and is currently estimated at more than $13 billion.
Industry opposition
While some industry analysts defend the practice, most US life
insurers oppose investor-initiated transactions, arguing that they
will prove damaging to the industry. Industry associations
uniformly allege that viatical settlements are an attempt to
circumvent the law, and have urged Congress to ban them outright.
They add that life settlements threaten carriers’ ability to offer
competitive pricing, as industry premium rates assume that a
percentage of policies in force will lapse.
Policy loans would offer insurers an attractive alternative to life
settlements, and would allow insurers to retain business currently
lost to life settlements players. For that reason alone, the
industry likely will leave no stone unturned as it seeks a way to
counter the life settlements industry. Given the meteoric growth of
settlements, they have no choice but to examine the
alternatives.
