A new development in what is becoming a major market
Can Web auctions do as much to help with sales of life insurance policies as they have with the sale of Star Wars collectibles?
Many in the life settlement industry are skeptical, but James Cavoli hopes to prove them wrong.
Cavoli is chief executive of Life Settlement Insights Inc., Cleveland, a life settlement brokerage firm that is trying to shake up the “secondary market,” or resale market, for in-force life insurance policies by working with a Web technology company and a Web auction company to form LifeX Inc. LifeX runs auctions for life insurance policies on the Web.
LifeX boasted about the sale of one policy through an auction in April, and then it disappeared from the media eye. Some life settlement market participants who were interviewed wondered whether the venture had disappeared.
But Cavoli says LifeX has sold 5 more term life and universal life policies through pilot auctions after the first auction. At press time, he was preparing to open the system to the public.
The pilot program attracted a dozen bidders. At one auction that lasted about half an hour, the policy had a cash value of $26,000, the “reserve,” or minimum price, was $60,000, and the winning bidder ended up buying the policy for $79,000. The participating bidders submitted a total of 19 bids, Cavoli says.
LifeX requires sellers and buyers to submit a large amount of paperwork, and it gives potential bidders 30 days to study the policies on the block. The buyer finances the auction process by paying LifeX a fee that amounts to a few hundredths of a percent of the sum paid to the seller, Cavoli says.
Cavoli is hoping LifeX will attract about 25 bidders once it is open to the public. Brokers are welcome to participate in the auctions, and brokers who sell through the auctions are free to negotiate their own compensation arrangements with clients, Cavoli says.
Although auction sales prices were not necessarily much different from the prices that experienced brokers could have obtained through a conventional sales process, “the [conventional] process for negotiating life settlements is cumbersome,” Cavoli says.
Speeding up and standardizing the process might cut transaction costs enough to push the minimum policy size below the current floor of about $250,000, Cavoli says.
“Below the $250,000 level, the number of policies increases dramatically,” he adds.
The life settlement market already is becoming a major market.
Life settlement funding firms probably bought life insurance policies with a total face value of more than $6 billion in 2004, according to Scope Group, Berlin, a German rating agency. In Germany, where investors in closed-end life settlement funds get tax breaks, life settlement funds attracted about 7 times more money during the first half of 2005 than closed-end funds that invest in energy production.
Although sales volume is increasing, financial advisors interviewed agree with Cavoli that the sales process still can be slow and awkward.
Ellen Fairbanks, a financial planner at MD&A Financial Management Company, Pittsburgh, found this out when she set about selling a 20-year-old $1 million second-to-die universal life insurance policy with premiums that were about to double.
The sales process took about 2.5 months, and the bid that was accepted was $130,000, or more than twice as high as the initial offer of $60,000, Fairbanks says.
Pennsylvania requires life settlement advisors to take a course that teaches them about life settlement market basics. But “what I didn’t realize was how wide the spreads are,” Fairbanks says. “The first bid is not necessarily the best one.”
Life settlement experts say many obstacles could block the way of organizations such as LifeX that want to use technology to improve the life settlement sales process.
“I would guess that the settlement industry is not yet ready to be as automated as the home loan industry,” says Doug Head, executive director of the Viatical and Life Settlement Association of America, Orlando, Fla.
“It’s pretty difficult in this industry,” says Brian Smith, president of Life Equity L.L.C., Hudson, Ohio, and president of the Life Settlement Institute, Bethesda, Md., an industry trade group. “Because 2 life insurance policies from 2 different life companies on the same insured are likely to be quite different from one another.”
In the life insurance industry, many abhor the idea of life insurance becoming a uniform “commodity” like rice or sugar.
Life insurance company executives cherish the idea of close customer relationships that may extend through many generations, says James Aronson, a Springfield, Mass., financial planner and life settlement advisor.
The sale of life insurance “is not just a transactional sale,” Aronson says. “It’s an emotional sale.”
But supporters of the Web auction concept note that consumers have been buying laptop computers and other complicated, nonstandardized products through Web auctions for years.
Cavoli says an auction house can cope with product differences by putting policy information in a standard format.
Meanwhile, for life settlement brokers who profit from the difficulty that qualified sellers have with finding qualified buyers, the idea of improving market efficiency may have little appeal.
One question is whether an efficient Web auction market would increase life settlement volume enough to compensate for reductions in commissions on individual transactions.
Aronson is skeptical about the idea, but Moritz Roever, a managing director at Scope, the rating agency, is optimistic. “Any increases in market transparency will bring more buyers and more sellers into the market,” he predicts.
Meanwhile, experts interviewed say systems and strategies other than a Web-based auction system could play a role in helping life insurance policyholders get more cash for unwanted policies.
Aronson, for example, says life insurers could preempt the life settlement industry by tying policy cash values to the life expectancy of the insureds. The insurers could keep older, sicker insureds out of the life settlement market by giving them extra cash when those insureds drop their policies.
Within the life settlement market itself, M. Bryan Freeman, president of Habersham Funding L.L.C., Atlanta, says systems such as actuarial software packages could make a difference.
“The life settlement market reminds me of the mortgage market 25 years ago,” Freeman says. “The mortgage market grew more efficient and matured very rapidly with the advent of computer hardware and software, and with the advent of a national market.”
Life settlement funding firms probably bought life insurance policies with a total face value of more than $6 billion in 2004, according to one estimate