Society of Actuaries Releases Life Settlement Survey

A survey on how direct writers and reinsurers feel about life settlements found that while 79% of 19 respondents felt that the growth of the life settlement market was either ‘negative’ or ‘very negative’ for the life insurance industry, there were companies that had mixed feelings about what the growth of life settlements means.

The survey was conducted by the Society of Actuaries, Schaumburg, Ill., during July-August 2008, just before the full force of the financial crisis hit in September 2008. A total of 19 direct writers and 4 reinsurers participated. Among direct writers, 84% of the representatives for respondents were actuaries and among reinsurers, 75%, with the fourth a part of senior management. Among direct writers, a third of respondents had in-force volumes of less than $50 billion; 37%, between $50-499 billion and another third, volumes of $500 billion or more. The reinsurers were evenly split with two that had life reinsurance in-force at year-end 2007 of between $100-499 billion and two with totals of $500 billion or more.

The negative reaction registered by the industry may in part be due to concern over the risk of losing tax-exempt status on all policies. Of 15 respondents, 79% were either very concerned or extremely concerned. Four responded to the SOA survey by saying that they were concerned. All the reinsurers said that they were at least concerned.

While 79% expressed negative feelings about the life settlement industry’s growth, the results were somewhat better when asked if the growth of life settlements was a positive as far as the growth in premium for the life insurance industry: 39% offered responses ranging from neutral to slightly positive or positive. A total of 42%, or 8 of the 19 respondents, were neutral to slightly positive or positive when asked whether it would be a positive as far as the growth in new clients and marketing channels is concerned.

While 63% of the 19 respondents indicated they had no plans to enter the life settlement market, 32% indicated that they are actively investigating future participation, according to the survey. One direct writer indicated that it actively purchased policies for investment and one indicated that it actively purchases policies for securitization.

The SOA survey asked those respondents monitoring settled policies what percentage of the policies with face amounts of $250,000 and above were settled in 2007. Seven respondents, according to the survey, estimated the percentage to be less than 1%.
Companies are changing their pricing assumptions because of exposure to life settlements, according to the survey. Of 13 respondents, eight or 52%, have
updated lapse assumptions and three, 23% have updated mortality assumptions. One has changed guarantees offered, and one commissions offered.

But when asked to characterize their concern about how the growth of life settlements could result in the loss of proceeds to original beneficiaries, 74%
were at least concerned while 26% were slightly or not at all concerned.

And when asked whether there was concern about the potential loss of the insured’s ultimate capacity to purchase insurance, 58% were at least concerned while
42% were slightly or not at all concerned.

But 74% were concerned about how the growth of life settlements would impact the reputation of their own companies and 58% were at least very concerned about
reduced profitability. And 79% were at least concerned about possible lawsuits from original beneficiaries.

A total of 44% felt that the life settlement market was a positive for their own company in terms of flexibility while five were neutral on the issue and
three were slightly positive. Two respondents were not positive at all, according to the SOA survey.

Some of the comments offered by respondents were as interesting as the survey responses themselves.

One respondent noted that “Nonforfeiture benefits need to be reflective of the economic value of the policy. If so, you wouldn't need the life settlement;”

Another noted that “It is not a coincidence that the STOLI and Life Settlement markets have grown at the same time that aggressively-priced UL products with
secondary guarantees and low or no cash values have proliferated. Investors have seized upon pricing that relies on policyholders acting contrary to their own best interests (lapsing for no value rather than settling for pennies on the dollar of real economic value) andpolicy designs that make a mockery of the standard nonforfeiture law. If the Life Settlement market ultimately forces companies to return to rational pricing and provide fair cash values, then it will have served a purpose;”

For the complete survey, go to: SOA Life Settlement Survey.