The life settlement market may be just an early example of an intersection between the life insurance industry and the capital markets.
Analysts at Moody’s Investors Service, New York, give that assessment in a new report on the life settlement market.
Although companies have started by buying and selling in-force life insurance policies, they or other companies could start trading variable annuity product guarantees, if and when there is value in VA guarantees, Moody’s analysts write in the report.
“Secondary markets will develop with third-party investors eager to purchase these options at values attractive to both the buyer and seller,” the analysts report.
Insurers that undervalue VA guarantee options could suffer as a result, the analysts warn.
For now, the immediate concern about the life settlement market is the sale of investor-owned life insurance contracts, which involve purchases by investors of policies on unrelated individuals, says Arthur Fliegelman, a Moody’s senior credit officer.
The rise of the IOLI market may be relevant to reviews of a company’s ratings, Fliegelman says.
Moody’s analysts note that fewer than 1% of life policies in force may fit life settlement companies’ purchase criteria.
The analysts cite an industry rule of thumb holding that a suitable policy is at least $750,000 in face amount on an insured with an attained age of at least 65.
Although the number of eligible policies may be relatively small, the eligible policies may represent a significant percentage of total U.S. outstanding policy cash surrender value, the analysts write.
Insurers that issue or have issued lapse-supported products are at most risk if the life settlement market continues to grow, the analysts write.
Lapse-supported products are issued based on the assumption that a certain percentage of those policies will be lapsed by their owners. The money made on these policies supports policies that are kept in force. However, if such policies are kept in force, the profit from them is not available to cover losses and face amount will come due on the death of the insured, the analysts write.
If investors buy these contracts, the “chance of premature lapse of the product becomes virtually nil,” the analysts write.
“Betting against efficiency is something that companies have to be careful about,” Fliegelman says.