Despite the enormous potential the life settlement market offers, experts are not sure how quickly it will get going. There has been too much confusion and notoriety surrounding these kinds of transactions in past years, says Ron Sussman, CEO of Voorhees, New Jersey-based CPI Companies, a firm that specializes in life insurance and also has a broker/dealer division, and until these are cleared up, he suggests, most B/Ds are going to be reluctant to get involved in the business.
"Life settlement transactions have earned a bad reputation for themselves because there have been too many instances over the past few years of people being forced to buy insurance for the sole purpose of selling it," Sussman says. "Because of this, most broker/dealers don't understand life settlements and don't allow their reps to do them. Insurance companies are doing a better job at policing, but there's a lot of clutter in the market with respect to how life settlements are used. This needs to be cleaned up before we see broker/dealers coming into the market in a big way."
More importantly, though, the future of the life settlement industry depends on whether consumers are willing to accept the fact that life insurance policies can be used for purposes other than what they were originally purchased for. A policy that had meaning a decade ago might not be needed in the same way today, and its owner might have a more pressing need for immediate cash. Being able to sell that policy therefore depends on the existence of a fully functioning, liquid, secondary market. "Whenever you dispose of something in the secondary market, you get a much better cash value for it," says Doug Head, spokesperson for the Orlando-based Life Insurance Settlement Association (LISA). "In New York, you can sell tickets to a great show on the street for more than cash value, and it's the same principle for life insurance, particularly when for the past 50 years, life insurance has been bought and sold as an investment instrument."
Life settlements emanated from the viatical settlements that became a big business at the height of the AIDS epidemic, when terminally ill patients sold their life insurance policies to third parties. The nefarious usage of many of these deals have tainted the industry since that time, but if the life settlement space is properly regulated and if people are willing to see the benefits of a liquid secondary market, there is no reason why the life settlement market cannot take off properly, Head says.
Attorneys like Brian Casey of the big law firm Lord, Bissell and Brook LLP agree. Casey, whose office is in Atlanta, believes the life settlement market is getting ready to take off, and a notice issued by the NASD to its members in August (NASD Notice 06-38) is a clear sign of this, he would argue, even if its focus was the treatment of variable life insurance settlements, which experts say form a very small part of the overall market.
"The NASD is foreshadowing more regulation to come," Casey says, and greater regulation will allow for a more transparent, more efficient secondary market. "With respect to all constituents, a secondary market for financial assets is good, as it creates liquidity and even enhances the value of the insurance product."
The more regulation there is, the greater also will be the interest of B/Ds in the life settlement business, Sussman says. Right now, the few broker/dealers that do life settlement transactions are following their own company guidelines, he says, but more universal regulation will allow a greater number of B/Ds to participate.
"There are a lot of reasons why broker/dealers should be doing life settlement transactions; the main one is because they will be able to give clients the ability to access value in the policies which the issuing insurance companies cannot," Sussman says.
In its August notice, the NASD reminded members that variable life insurance settlements are security transactions, and therefore are subject to all NASD rules regarding securities. NASD-regulated persons should consider the impact of the Notice on their current practices related to variable policy transactions, Casey wrote in a recent brief to his law firm's clients, and consider adopting some of the best practices intimated by the NASD. Beyond that, market participants are expecting the NASD to come forth with guidance for non-variable insurance settlements as well, as these form the bulk of the marketplace, and are, Casey writes, an area of concern for the NASD.
"We favor the development of a well-developed, state-based regulatory system," LISA's Head says. "But there are efforts to develop a more efficient market by increasingly setting standards to allow policies to be valued in a more systematic manner. We are also looking forward to getting a better understanding with the securities regulators, notably the NASD and the North American Securities Administrators Association (NASAA), and we expect that more broker/dealers will get involved in this market as we get better regulated."
Savita Iyer is a freelance journalist who has long covered different aspects of the global financial services industry. She is based in Mysore, India, and can be reached at email@example.com.