Institutional investors are reshaping the U.S. viatical and life settlement markets.
Viatical settlement brokers created the modern secondary market, or resale market, for in-force life insurance policies in the 1980s. Back then, most of the sellers were insureds with life expectancies of less than 2 years. Most of the investors were individuals who were willing to put money in a new, untested investment vehicle.
Now, the market is becoming “totally institutionally funded,” according to Moritz Roever, an analyst with Scope Group, Berlin, a German fund rating agency.
For money managers, a portfolio of life settlements is “a great asset class because it diversifies investments,” Roever says.
Medical advances that improve insureds lifespans can and do hurt life settlement portfolio returns. But life settlement returns are almost completely independent of the fluctuations in interest rates, inflation rates and other economic factors that drive returns on most other investments, Roever says.
German closed-end funds contributed about $650 million of the $2.5 billion in capital that flowed into the U.S. life settlement market in 2003, Roever estimates.
Scott Page, president of Lifeline Program, the life settlement unit of Page & Associates Inc., Fort Lauderdale, Fla., sees major banks expressing an interest in buying life insurance policies.
Institutional funding “will be the only fund source for this industry,” Page predicts.
Scope has reacted to the shift in life settlement funding sources by starting a program that rates the German and U.S. life settlement companies that attract the most capital from German closed-end mutual funds.
Many executives in the life insurance industry say selling a life insurance policy is usually a bad strategy for most insureds.
One traditional argument against the practice is that giving an investor an interest in rooting for the death of an insured is a bad idea.
Another argument has been that the prices insureds get for their policies are too low.