A continuing issue, the report adds, is the bad rap the industry suffered in years past in cases involving “stranger-owned life insurance:” policies bought and funded by third-party investors for the purpose of subsequently selling the policies on the secondary market. Often these transactions involved financing arrangements in which loans extended to cover the premiums carried such onerous terms as to make a life settlement a necessity.
Industry organizations, including the Life Insurance Settlement Association (LISA) and the European Life Settlement Association (ELSA), have launched initiatives to counter these “reputational headwinds.” The efforts have yielded some positive results, the report notes, including the establishment of industry standards for recommending structuring life settlements; a clarifying of regulations governing the transactions; and legislation in some states mandating that insurers advise seniors of the option to settle as an alternative to lapsing or surrendering their policies.
The Conning report observes, too, that the industry’s stakeholders — investors, life settlement providers and brokers — are getting better at pricing the transactions. That improvement is based on a savvier understanding of factors determining the value of a policy, including the life expectancy of policy sellers.
Nonetheless, the industry faces “unresolved challenges.” Among them: high-profile lawsuits about overpricing and legal prosecutions alleging investor fraud. To boot, investors bear all the risk (and providers and underwriting partners none of the risk) if a life settlement doesn’t perform as expected.
“In short, the investor is the only one with ‘skin in the game’ when purchasing a policy,” the report argues. “This one-sidedness is recognized, and some life settlement investors and providers are experimenting with ways to better align investor, provider, and underwriter interests.”
The study also flags as a challenge the expansion of investment opportunities in secondary market insurance to alternative vehicles apart from life settlements. Upshot: While the market will continue to grow, it will not reach levels attained before the 2007-2009 recession.
“Looking ahead, investor interest is likely to translate into steady growth in new life settlements,” the report states. “That growth, while steady, is unlikely to reach pre-crisis peaks."
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