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.”
He said that inclusion of the language in the filing reflects the desire by Phoenix to educate policyholders to understand that the company “very consistently opposes an inappropriate use of a contract through stranger-owned or investor-owned transactions.”
Transamerica Re’s Rutledge says that as the market develops, reinsurers can work with life insurers, helping them to adjust to the fact that persistency should be viewed “on a neutral basis. It is not a good or bad thing,” he says, but just a matter of adjustment to greater persistency as contracts remain in force because of life settlements.
“To some degree, it does change the expected experience on the underlying block,” he says, adding that both the reinsurer and the cedent need to make sure the pricing is consistent with both mortality and persistency.
Chris Stroup, chairman and CEO of Wilton Re, Greenwich, Conn., says that for reinsurers, it is important to evaluate contracts carefully that are prone to settlement and to reflect that possibility in any decision to reinsure.
The best place to start, according to Stroup, is to ask a basic question, “What is the purpose of the insurance?”
If a 50-year-old individual earning $100,000 with a couple of children who have college on the horizon purchases life insurance, there is a real need, he says, but if a 78-year-old person whose family is grown purchases life insurance, that could be another matter. If an estate tax need exists, that easily can be determined when examining the contract, he adds.
When a reinsurer sees a contract on an older life with a large face amount, there is an increased likelihood that the contract could be an investor-owned policy, he says.
Stroup distinguishes between investor-owned contracts that have started to surface in the last two years and more traditional life settlements. He says more traditional life settlements address the need for liquidity, but he is not sure if most policyholders have such a need for liquidity that they would have to settle their contracts. If there is such a need, life insurers will address that need, he says.
Another factor that reinsurers need to look for before reinsuring business is lapse-supported pricing. If a company is expecting a 6% lapse rate and the lapse rate ends up being 2%, then the math indicates there is a potential problem, he notes.
Reinsurers need to make sure that direct writers are adhering to disciplined financial underwriting that they would require of themselves, according to Stroup.
George McKeon, a life policy analyst with Conning Research & Consulting, Hartford, Conn., a unit of Swiss Re, says the life settlement market is growing and that policy persistency is a factor companies will need to look at more carefully as the market evolves.
Presently, better mortality may be softening any increase in persistency, but as the volume of life settlements grows, that could change, he adds. There is at least the potential for profit erosion and to the extent that life reinsurers hold contracts that are settled, they could be impacted, McKeon continues.
Life insurers and reinsurers do not face a cataclysmic impact from life settlements, he says, but the change in the market will require that they start to price policies differently. The well-managed companies will better underwrite these risks, he adds.
Investor-owned contracts can be detected by stronger underwriting, tighter applications and monitoring of agents’ activities, being more careful about the ages that they underwrite, he says.
And, in some cases, companies could pull products from the market, reprice them and then reintroduce them, he says.
While an argument can be made that life settlements are good for the industry because they create more value for the policyholder, investor-owned contracts may be counterproductive, he says.