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January 21, 2007 at 02:00 PM
Reinsurers need to better manage risk to reflect the growth of the life settlement market, according to life reinsurance experts, who say part of this process entails helping direct writers manage new risks that surface as the life settlement industry evolves.
Life settlements “have grown exponentially in recent years, and that trend appears likely to continue,” according to an NASD Notice (06-38) released in August 2006. The notice cites a recent study that estimates policies settled in 2005 had a collective face value of $5.5 billion and others that say the “potential market exceeds $100 billion.”
Additionally, a May 2006 COSSNewsline article by Chris Kite, an insurance attorney, cites remarks made during an industry meeting by Brian Casey, a partner in Lord Bissell & Brooks’ Atlanta office, as placing the market in 2005 at between $5 billion and $9 billion in face amount, with estimates rising as high as $14 billion in 2006.
Risk management using a best practices approach may be the best way for reinsurers to prepare for the growth in the life settlements market, say executives at Transamerica Reinsurance, Charlotte, N.C.
During their conversation with National Underwriter on how life settlements will impact reinsurers, Jim McArdle, senior vice president, sales and marketing; and Ken Conners, vice president, chief underwriting officer, both with Transamerica Reinsurance, were careful to make 2 points. The first point is “there are certain legitimate and very good uses of premium financing,” but non-recourse premium financing is a cause of concern for reinsurers. The second point is that “a life settlement of and by itself is not necessarily an evil thing,” but you have to identify the abuses.
They both differentiate between those products that are originated with the intent to sell the policy and those products that are held for a period of time and are sold because the needs of the insured legitimately change.
The interests of both direct writers and reinsurers are aligned in identifying and managing those abuses, says McArdle. “The first defense is to know what is going on.” Detection and then prevention are important steps in the process, he adds.
Conners agrees, saying it is important that direct writers be attentive to whether policies are likely to be sold again shortly after purchase, and best practices established by a reinsurer can help a direct writer “if not discourage such contracts, at least identify them.”
Originators of non-recourse contracts are quick to sense direct writers who are not able to detect these contracts, says McArdle.
To the extent that direct writers are not able to work toward best practices to detect potential abuses, McArdle said it could conceivably be factored in to the price of those direct writers’ reinsurance contracts. To the extent that is negative, those contracts would be negatively impacted, he adds.
Reinsurers can also treat contracts that could involve premium financing on a facultative or case-by-case basis so that the reinsurers can be part of the decision-making process, says McArdle. It is the non-recourse premium financing that is “really the red flag,” Conners adds.
