The period between 2007 and 2009 saw a massive increase in the life settlement industry. New programs were introduced every month, and industry professionals focused a large amount of effort on marketing these programs to the producer channel. In late 2009, though, both industry issues and global economic issues caused an abrupt disturbance in the industry.
This disturbance cost many producers capital and damaged lifelong relationships with senior clients. On the other side, life settlement investors shifted their focus to keeping their business and portfolios viable after the market shifts. With its attention focused inward over the past few years, the life settlement industry has failed in educating and assisting these jaded producers on the changes and improvements to the market.
Consequently, there is a large population of producers who do not trust life settlements and a new generation of producers with no exposure to the market.
Bringing education back to the producer channel is key in continuing the upward momentum of the life settlement industry.
The life settlement market slowly reinvented itself from the devastation, becoming more regulated, sophisticated and structured. Capital re-entered the market with a long-term buy and hold strategy for traditional life settlements. As the industry changed, these developments did not flow down to the producers mainly due to buyers focusing on distressed portfolios and a small number of producers still actively bringing life settlements to market.
By looking at a few key points of the current market conditions, producers can be more successful. These points give an insight to what investors look for when examining a life insurance policy. They can assist in the successful targeting of possible cases.
The current desired characteristics of life settlements are drastically different than when producers first entered the market. While many life settlement brokers advertise wide purchase parameters, the reality is that the majority of life settlement investors currently have narrow parameters to minimize the volatility of their portfolio. These buyers focus on old healthy insureds and not extremely impaired insureds.
Insureds need to be at least in their late 70s in order to sell the insurance policy. In addition to age, most purchasers focus on life expectancy reports of 12 years or less. By looking at these two points, a producer can quickly filter out younger clients in their 60s and early 70s before wasting time and money on a policy with a low probability of settling. Outside of the insured, the majority of investors tend to focus on smaller death benefit policies at $3 million or less with a high demand for the $1 million or less files.
Once a proper candidate has been isolated, setting the clients expectations for time and possible offers is very important. The life settlement process is long and time consuming. By setting these expectations upfront, the insured is more aware and involved in the process.
From start to finish a life settlement can take four to six months. Throughout the process, the insured and policy owner are continually involved in the transaction.
Managing offer expectations is important. After months of initial underwriting and work by both the producer and client, many files never close due to the client expecting double or triple the value the market assigns it.
Life settlements attract sophisticated investors enticed by longevity and mortality risk as well as the high return levels currently possible. While many insureds and policy owners may expect to recoup paid-in premiums, the goal of the life settlement purchaser is to offer a multiple of the cash surrender value while still achieving an attractive internal rate of return. Many of the quality life settlement brokers and providers can give producers a ball park value range before the underwriting process becomes too time consuming and expensive to see if the expectations of both the buyer and seller are in line.
The preparation of the life settlement file is an area where the lack of education is apparent. In the early days of the industry, the demand outweighed the supply, and life settlement professionals took any documents they could, regardless of quality, to market. In today's market, analysts focus on quality life settlement files, letting potentially great policies fall to the bottom of the queue.
While much of this preparation falls to the life settlement professional assisting a producer, the producer can still assist in streamlining the process by knowing what the analyst needs for the evaluation, with the main issue being the illustration. While there are many aspects to the preparation of a life settlement file, the illustration can be seen as the piece that can cause an offer to be made immediately or weeks after it is received.
Analysts prefer to see a current illustration with account and cash surrender values to age 100 and maturity extension riders illustrated in the ledger. Regardless of age or health impairment, investors are interested in the tail risk of a policy and examine the probability of the insured reaching the end of the policy contract. Modeling software works much better with these types of illustrations. While premiums may seem to be lower in other illustration scenarios, analysts are able to value (and pay) more for files when working their preferred illustration scenarios.
Now that the life settlement industry has stabilized, it is apparent that education is needed, both for the policy owners as well as producers who service these clients. Only by continuing to educate both veteran and novice producers will the life settlement industry continue to grow and flourish.
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