While life insurers are on the front line of a fundamental change to the market as life settlements continue to flourish, reinsurers now are beginning to ponder what the rise of the secondary market means for them.
Reinsurers are weighing what this market shift means for their business and how it will affect the way they work with life insurers. At least one leading executive in the life reinsurance market is saying that a secondary market could be a healthy development for the life insurance market.
Paul Rutledge, president of Transamerica Reinsurance, Charlotte, N.C., a unit of Aegon Group, says that “in the long run, it will be very healthy for the retail market.”
Rutledge notes that the life settlement market is still young, so there is no certainty on how it will ultimately develop. That development may take several more years until tax and regulatory implications of settling contracts are better understood, he continues. He also distinguishes between the life settlement market and investor-owned life insurance, which is purchased with the initial intent to settle a contract.
According to Rutledge, once the market does begin to mature, the idea of settling contracts could expand beyond just life insurance.
A secondary market for immediate annuities also is something that Rutledge says he could see eventually emerging.
Its development goes beyond arbitrage schemes of buying life insurance contracts and immediate annuities, he explains, but rather is a natural progression of the development of immediate annuities.
In the past, Rutledge says, people may have been more reluctant to purchase immediate annuities because there was no way to get their money back. But if a secondary market develops, then there might be more willingness to purchase the product, he adds.
As the market develops, insurers should consider offering life settlements to their own policyholders, Rutledge notes. If direct writers offered a life settlement option to their contract holders, it could bring more efficiency to the life settlement market, he says.
While life insurers may not yet be offering life settlements as simply another option in a life insurance contract, the growth of the life settlement market is beginning to make its effect felt in the wording of product filings.
Indeed, the settlement of contracts showed up in a PHL Variable Life Insurance Company product filing approved by the Florida insurance department on March 15. PHL Variable Life Insurance Company, Hartford, Conn., is a unit of The Phoenix Companies Inc., East Greenbush, N.Y. The filing already had been approved in Connecticut.
The Phoenix Accumulator universal life III (PAUL III) contract includes the following language addressing life settlements:
“The insured is the owner of this policy, unless otherwise provided in the application or if ownership is changed by later transfer of ownership. If, however, you are offered consideration to transfer ownership of your policy or any interest in your policy including a collateral or absolute assignment to a third party, no such transfer of ownership shall take effect unless we or one of our affiliated companies first have the right to purchase your policy. We require evidence satisfactory to us of any consideration offered by such third party.”
“We put the language in to protect our right to retain control of the policy,” says Joe Fazzino, a spokesman for Phoenix. The language “does not require us to purchase it,” he adds. The product was introduced at the end of March.
Phoenix has seen some life settlement activity and wanted to address that development, Fazzino says.
When asked whether “one of our affiliated companies” in the contract language could suggest Phoenix might want to purchase a life settlement company in the future, Fazzino responded that Phoenix does not own a life settlement company and “we do not speculate on what we might or might not do.”