Wall Street Journal recently published an article, “Negative Interest Rates and
Insurers: Be Afraid,” discussing rates in
Europe that have gone negative in some countries and how this hurts European
insurers. The article does not discuss,
but I would argue, that those who hold policies from these insurers should consider
the life settlement market as an avenue to sell unwanted and unneeded policies.
the article notes, negative interest rates impact European insurance companies
in three ways. First, these companies
invest in bonds to create a spread between the money they earn on the bonds and
the guaranteed rates on insurance policies.
With negative rates, this spread has disappeared. While longer term the company can lower its
guarantee rates, those policies in force cannot be changed.
the amount of money that insurance companies must keep in reserve is based on
the present value of the company’s projected earnings. As yields on bonds are in negative territory,
the returns are projected to be lower and thus the amount of capital required
to remain uninvested. This dead capital
acts as a further drag on profits.
consumers may purchase less insurance in the future: If guaranteed rates on policies drop,
insurance products become less attractive relative to alternative investments.
could these developments affect a policyholder with a European insurer? As
noted in past blogs, these companies have, and may continue to, raise various
fees and costs on existing policies. The
worse the financials of the company becomes, the more likely this is to
happen. Thus, the policy may become more
expensive to maintain than originally projected.
the promise of the insurance policy payout is based on the ability of the
insurance company to pay. Often the
policy is purchased decades before the payout is needed. If European insurance companies decline as a
credit risk, the prospect of paying premiums for many years becomes less
these and other reasons, a policy holder may consider selling the insurance
policy in the life settlement market.
The policy holder could use the proceeds of the sale to invest in a
non-insurance asset class, or to re-purchase insurance from a more stable
American insurance company that is not struggling with negative interest rates.
for those who own life insurance issued by European insurance companies,
education is the key to making a rational economic decision. For many policyholders, selling a policy
makes the most sense. To learn more
about options available to consumers who no longer need or can afford their
life insurance policies, visit the “Life Policy Owners” section of the LISA website.
About the Author:
Young, CLU, ChFC, CASL, is the President of Magna Life Settlements, Inc., a well-established life settlement provider focused on
maintaining transparency, risk management and rigorous process control in the
purchase of life settlements. Magna is owned by Vida Capital, a
vertically integrated asset management company providing longevity contingent
investment solutions to institutional and individual investors. Dan is the Vice
President, Asset Management and General Counsel of Vida.
In addition to his role at Vida, Mr. Young is an adjunct professor of
regulatory law at the University of Texas Law School, Board Member and Chair of
the Legal Committee of the Institutional Longevity Markets Association (ILMA),
Board Member of the Life Insurance Settlements Association (LISA), and a
frequent speaker at life settlement industry conferences. Prior to joining Vida
Capital, Mr. Young was the President and CEO of New York Life Insurance
Company’s Broker-dealer and Registered Investment Advisor. Mr. Young graduated
from Stanford University with Honors and Distinction and from the University of
Chicago Law School with Honors.