The life insurance and life settlement industries have been at odds with each other for quite some time now. This is understandable but unfortunate.
A better approach, for both industries, would be to find areas in which they can work together. As will be seen, underwriting reporting provides one such opportunity.
First, let’s review the current tension.
It is understandable that the life insurance industry would be concerned about abusive practices in which agents offer financial incentives to seniors to apply for life policies, with the premiums financed by non-recourse loans and the sale arranged to “stranger” investors. These deals undermine the principle of insurable interest and at the same time threaten the tax-privileged position of the life contract.
But when the life industry solution is to put a 100% excise tax on the consideration for life policies sold within 5 years of issue, it is effectively using a cannon to kill a flea.
It is understandable that the life settlement industry would take issue with a proposal that would mortally wound the secondary market for life insurance and in the process deny consumers fundamental property rights by limiting their ability to sell their life contracts.
The truth of the matter is that the life and life settlement industries have far more to gain than to lose from each other.
A viable secondary market for life insurance makes the life insurance contract a more valuable product to sell by increasing the purchaser’s surrender options. At the same time, a vibrant secondary market for life insurance depends on a vibrant primary market.
If abusive insurance sale/resale practices result in an end to the tax-privileged position of life insurance, this will substantially reduce the amount of life insurance purchased, which will reduce the supply of policies available for resale, which would be devastating to the life settlement market.
Rather than fighting each other, life and life settlement industry leaders should be exploring areas in which to work together. As noted earlier, one such opportunity involves the area of underwriting reporting.
The Medical Information Bureau is one of the best and most cost-effective underwriting tools available to life insurance companies. Member companies code impairments that they uncover in the underwriting process to the MIB’s database. This information then becomes available to other member companies who might underwrite the same applicant. So, if someone is turned down for life insurance by Company A because he has advanced lung cancer and then forgets about this condition when he applies to Company B, a simple MIB check will reveal this condition and thereby give Company B the opportunity to further question the applicant about this condition.
What if there was a way to allow life settlement underwriters to input to the MIB significant medical information uncovered in the review of a proposed life settlement transaction?
The mechanics of doing this would not be simple. Current MIB rules, which do not allow for non-member underwriting input, would have to be changed. Safeguards would need to be put in place to protect the insured’s privacy and to assure that he or she had given informed consent. But the benefits would be worth the effort.
When someone applies for life insurance, the person has every incentive to conceal or forget about impairments that might result in a rated or declined policy. On the other hand, when the same person tries to sell a policy, the person has every incentive to disclose all possible health impairments.
The underwriting value of input from secondary market transactions would therefore be priceless for the primary carriers and would help reduce the amount of insurance fraud.
Furthermore, input from life settlement underwriters could help cut back on some of the abusive practices in the life and life settlement industries.
For example, my office once reviewed a portfolio of premium financed policies that had been recently issued at standard or preferred rates, but for which our average mortality rating was 150% of standard, with one policy rated at 300% of standard. This kind of disparity can happen due to sloppy underwriting at the issuing company, “business judgments” to accommodate big life producers, or selective memory on the part of the applicant.
Still, if a legitimate way could be found to get this information back to the issuing company, it just might reduce the amount of “underwriting arbitrage” in these deals. This would be of great benefit to the life industry. It might cut the amount of premium financed life settlement transactions a little bit, but in the long run it would be good for the life settlement industry, too–particularly if it helped to get the life settlement industry on the same side of the table as the life insurance industry.