The life settlements market is growing at a significant rate, but it is difficult at present for anyone to say much beyond that.
Because the market is still relatively young, many of the tools typically used to gauge insurance markets have not been developed for life settlements, leaving observers to get by with their best estimates.
In a report released earlier this year, George McKeon of Conning Research estimated that the life settlement market involved the transfer of roughly $3.3 billion in 2004 and grew to $5.5 billion last year.
“It’s big and it’s growing,” he said, adding that the market is “probably” going to double itself this year.
Ramiro Rencurrell, president of the Life Insurance Settlement Association, echoed McKeon’s sentiments, offering what he cautioned was a rough estimate that the life settlement market would see $15 billion to $17 billion in settlement amount in 2006.
But, Rencurrell added, the life settlement industry is “extremely hard to quantify” because it has no standard measurements in place and informal polling can fall on the high side, as the same policy marketed to a number of life settlement firms are often counted by each one.
Additionally, McKeon’s estimate includes only what he considers “true life settlements.” That category includes only those policies “not taken out with settlement in mind.”
Rencurrell said LISA is working to establish a process to better gauge the industry using a confidential survey that tracks which policies are being sold and asks how much face value is being transferred, at what price, and how much greater than the surrender amounts.
Additionally, Rencurrell said the industry is making efforts to offer a clearer picture of current conditions by working with rating agencies. Already, he said, 2 rating agencies are looking at the securitization of life settlement company portfolios, and he added that a more in-depth tool is in the works. The rating agencies are working with settlement companies, he explains, to establish a system that would thoroughly examine the policies being purchased by investors in terms of how much face value they have, how much they were bought for, and even the rating of the life insurer that issued the policy.
“If we can set up a process and track the individual policies being sold, then we can get a good snapshot” of the market and which policies are most attractive to investors, he said.
Rencurrell believes the life settlement market’s potential for growth remains strong, saying the industry is “very far from plateauing.”
Another example of the growth in the life settlements market, Rencurrell said, can be seen in the increasing number of players. Over a 2-year period, he observed, LISA membership has increased from between 30 to 40 members to roughly 140 currently. That increase, he added, “mirrors the growth of the industry.”
Additionally, he said, more life companies are allowing their agents to be involved in life settlements.
Perhaps most importantly, Rencurrell noted that “significant” amounts of capital are coming into the market from institutional investors, to the point where individual investors from the old days of viatical settlements are “almost an extinct species at this point.”
However, McKeon said there does not seem to be a consensus that life settlements will continue to grow. Although McKeon said he believes there will always be some market for life settlements, he added that such an opinion is not universal.
“Some believe this will burn itself out,” he said, “that all the easy sales will have been made.”
Already, McKeon said, there is “more money than policies” in the life settlements market, and the “target sweet spot” of a senior with a big policy, declining health and the willingness to sell is fairly uncommon.
For the most part, McKeon said, life insurance companies are not overly concerned with the life settlements market just yet. The true impact on insurers’ profitability at this point, McKeon noted, “remains unclear” and the relatively small size of the life settlement market has lead to the mindset among many insurers that “this isn’t really big enough yet.”
In a recent conversation with an actuary at a “major life company,” McKeon said the actuary estimated that only about 1% of his company’s policies would be ripe for settlement.
Adding to the concerns about the potential for the market are the steps that could be taken to ensure that only the “true” settlements McKeon referred to will exist. The more ethical players in the life industry, insurers along with life settlement investors and producers, have encouraged steps to ensure that the process is more transparent. Additionally, he noted the life companies that are concerned about potential abuses have begun taking steps to weed out those policies that might be purchased for the settlement process by tightening their underwriting or adding questions to their application.
A number of life insurers remain skeptical of allowing their agents to be involved in settlements, and Rencurrell questioned why life insurance companies aren’t more supportive of the life settlements market, which he argued provides a boost to life insurance sales.
“The insurance companies need to start treating us as an ally,” he said, adding that life settlements “help boost the primary market significantly,” as consumers are more likely to purchase coverage if the prospect of a better return exists, should the need arise to sell the policy.
Many of the problems facing the life settlement market involve the transparency of the settlement process. Overall, McKeon said he believes that life settlements are a “positive feature for the consumer,” but there are also “a number of life settlement providers who need to clean up their act.” That portion of the industry, he said, represents “a number of providers that focus more on the commission they will earn instead of the true help they will provide their client.”
The financial incentives for a life settlement provider, he noted, are potentially very significant, given the high fees that are often involved with selling a life policy. “It’s not uncommon to end up with a 5-digit number, or even a 6-digit number” in fees and commissions at the end of a transaction, he said.