They may not like it, but life insurers have no alternative but to
acknowledge that the life settlements market is here to stay and
will continue to grow rapidly. Driving the market are significant
inflows of capital from global investors lured by a unique
alternative asset class. Charles Davis
A decade ago, life settlements were insignificant in the US
investment business. Today, investment managers worldwide are
channelling capital into life settlements, creating a booming
market expected to top $6.1 billion in policy face value when 2006
totals are tallied. The result is an increasing number and value of
life insurance settlements to meet growing demand, despite
lingering obstacles hampering channel capacity and product
availability, according to a new study by consultancy Conning
Research and Consulting.
Conning estimates that $6.1 billion in face value was transferred
in 2006, up from $5.5 billion in 2005 and $2 billion in 2002.
Conning identified growth drivers and limitations in the market and
explored infrastructure supporting life settlement investors.
Conning painted a picture of a market shifting from one that was
capital constrained to one in which a lot of capital is chasing a
limited number of policies available for purchase.
Secondary market alternative
Life settlements provide a secondary market alternative to seniors
who hold policies they no longer want or need. As the market grows,
it can provide an attractive alternative to surrender, assuming
that the trend towards increased transparency and disclosure
continues, the study said.
“With the amount of capital available to this market, life
settlements are here to stay,” said Stephan Christiansen, director
of research at Conning, in a release. “While the settlements market
still carries some baggage from the earlier viaticals market from
which it originated, it is now clearly separate, with signs that it
is maturing as it grows. Life insurers need to anticipate the
growing impact of life settlements in their ongoing product
development and pricing.”
In the life settlements market, Conning sees convergence of several
trends confronting life insurers. First, policy owners increasingly
demand products and services that provide flexibility. This
increasing consumer flexibility creates the second thread, an
accompanying increase in the level of risk in accurately pricing
products. Finally, life settlements represent the continuation of
third-party providers assisting and influencing policy owner
behaviour, without concern for the best interest of the
Successful use of capital
To address the third-party provider issue, insurers and the broader
investment management sector are turning increasingly to life
settlements. Supporting these investors is an emerging
infrastructure that helps them effectively apply their capital in
this new market. However, this new infrastructure does more than
increase the supply of capital flowing into life settlements.
“Its need for an ever-larger supply of policies, and the amount of
capital it could potentially generate, is becoming a catalyst for
fundamental changes in life insurance,” the report said. “While
life settlements are young, as an asset class, and participants and
insurers are still struggling to understand the implications of its
growth, one conclusion is beginning to emerge. The global capital
market has identified life insurance policies as an attractive
investment, and a potentially valuable addition to an investment
portfolio. As a result, life insurers will need to adapt to markets
where policies will be traded.”
Conning expects global capital to continue flowing into life
settlements and “conservatively estimates” that between 2007 and
2010 the US life settlement market could range between $90 billion
and $140 billion in policy face value per year.
This staggering growth rate is even more amazing given the
obstacles facing the life settlements industry in the US. As
Conning noted in the study, the life settlement marketplace is
built on a structural inefficiency. Insurers are unable to reprice
policies once they are issued. Life insurers, even if made aware of
the new information, are unable to adjust their surrender value; in
essence, they are locked into the status of always offering the
lowest policy value.
Allowing life insurers to offer their own life settlement would
increase competition, and policy owner choice, the study
“The strategic advantage shifts towards the life insurers because
they have economies of scale, along with internal financial and
knowledge resources, often lacking among life settlement
investors,” the report said. “These advantages, all other factors
being equal, should translate into a higher life settlement offer
from the insurer than from the life settlement investor.”
Investors are attracted to life settlements because insurance is
seen as a non-correlated alternative asset. Life settlements
provide non-correlated diversification because insurance policies
are independent of factors contributing to economic downturns, such
as interest rate fluctuations and increasing fuel costs.
As a result, life settlements are one way to reduce a portfolio’s
exposure to sudden downturns in equity or bond markets.
The result, the study found, is that investors worldwide are
creating a secondary market for life insurance. This will create
added pressure on insurers to broaden the supply of available
policies for transfer, either by opening new markets or by
expanding product offerings in existing markets.
The report shows that while life settlements are young, as an asset
class, and participants and insurers are still struggling to
understand the implications of its growth, one conclusion is
beginning to emerge: the global capital market has identified life
insurance policies as an attractive investment, and a potentially
valuable addition to an investment portfolio. As a result, life
insurers will need to adapt to markets where policies will be
traded. The insurer’s strategic challenge is identifying what the
best adaptation is.
The US, the UK and Germany are three of the largest markets in
terms of the amount of life insurance in force, the study said.
However, it continued: “Insurance is truly a global product and
investors could seek new markets to find a sufficient supply of
policies. Insurers in these markets may find themselves facing a
developing life settlement market if investors decide the
combination of potential supply and regulatory infrastructure is