Life settlement companies say they are seeing the value that disclosure can bring to a settlement transaction for their clients, regulators and even for themselves.
The value in disclosure for company executives is that it lets all parties involved see the work that was done to put together a transaction. Additionally, disclosures can be used to show regulators that the settlement was conducted above board.
“It’s all about transparency,” said Jim Cavoli, president and CEO of Life Settlement Insights in Cleveland, Ohio. LSI recently introduced what it calls the “Secondary Market Efforts Report and Offer Summary Sheet,” a new disclosure report providing detailed information about the policy being sold, the potential buyers who saw the policy and the offers they made for it.
Cavoli said the new disclosures were designed to provide a “comfort level” to those selling a policy and their advisors. “This lays it out,” he said.
Much of the information in the reports, he said, was included after the company took an informal survey of its clients and the advisors and broker-dealers with whom it works.
“People want to know what’s going on, who saw it and how much activity there was,” he said. In addition, showing how a settlement was reached also helps to explain the amount of time that settlements can take.
“Everyone complains that it takes too long to do a settlement,” Cavoli said. “This shows why it takes so long.”
Cavoli said that disclosing how a settlement was reached can also help LSI justify the fees it collects, which he said are based on the “value created” for the seller of the policy rather than the more typical method of basing fees on the face amount of the policy.
“You can stick to your guns and collect what is due, if you have transparency,” he said. “We get paid without getting chiseled down.”
David Dalton, LSI’s manager of marketing and corporate communications, noted that while increased disclosures provide a service to those with whom LSI works, the reports are not “entirely altruistic.” Providing that data to clients and advisors means the company has to collect that data, which in effect creates a wealth of market research.
“In 6 months to a year, we’re going to know this market better than anyone, because we’ll have that data,” Dalton said.
Alan Beurger, CEO for Philadelphia-based Coventry, said he believes disclosure is “essential’ to the process and there should be more disclosure to better combat investor-originated policies and other potentially troubling arrangements.
“They should be informed that they may not be able to get coverage later with a policy in the secondary market” or that strangers will own their policy, he said. “That should be true for every provider.”
Regulators are also keeping their eyes on the life settlements industry with a focus on more disclosure and transparency.
In a notice to members issued in August of last year, the National Association of Securities Dealers said that as variable life insurance policies are securities, any settlement involving such policies would also be considered a securities transaction.
John Gannon, vice president for investor education, said the NASD decided to issue the notice because of the growing role of life settlements in the market.
“The reason it came up is the increasing volume of life settlements in recent years,” he said, and the notice itself noted studies showing the potential market for life settlements amounting to more than $100 billion.
Gannon said that no specific incident or complaint led the NASD to issue the notice, but it felt “there really is no transparency in the secondary market” and wanted to ensure that investors and brokers are aware of the requirements.
The NASD’s position, as stated in the notice, is that any life settlement involving a variable policy should be treated as a securities transaction and conducted along NASD rules. Specifically, he said, that means following Rule 2320, the “best execution” rule, which outlines the requirements that ensure “reasonable diligence” has been taken to confirm the client is suitable for the transaction and receives the best deal. Gannon said that other factors beyond price also play a role that could be more significant in life settlements, such as the timing of the transaction and the “quality of the market participant.”
Cavoli cited the NASD’s notice as something that “got us thinking about this report” and the requirements the broker-dealers the company works with would have to meet. “We work with a lot of broker-dealers, and so we tried to build up our process” so it would meet the regulatory standards, he said.
Buerger said that Coventry had already assumed the NASD’s position, and it “wasn’t a really a new position, in my opinion.” In any transactions involving variable policies, he said, Coventry already ensures that it is working with a registered broker-dealer. Additionally, he said Coventry does disclose commission arrangements and will tell the policyholder how much commission is received if asked.
Cavoli said the rules imposed by the NASD on variable life settlements are “not that bad,” and disclosures can help combat some of the negative stereotypes of the life settlements industry by showing suitability and due diligence.
Both Cavoli and Buerger seemed open to the idea of more regulation on disclosure, in fact.
“This industry is moving very fast towards certainly more regulation, and probably better regulation,” Cavoli said. “To the extent that it requires people to raise their game, that’s a good way to go.”
That regulation could also help reduce the costs of a settlement transaction by bringing more certainty into the process and allowing for more efficiency. The high transaction costs, Cavoli said, are a “sign of inefficiency,” and efforts should be made to improve them.
“Once we get certainty in the regulation, then the efficiency will come,” he said. “Having a rule that everyone operates under–that’s a good thing.”
Additionally, Buerger said the policyholder should be told that some arrangements, such as a pre-arranged settlement or a front-end payment, are illegal, and a lender sharing in the death benefit to a greater extent than the indebtedness is usurious and possibly illegal as well.
“That should be required, because it should be true,” he said. “It should be clear in the law.”
However, he noted that life settlements “are just like life insurance” in that companies have to deal with 51 different regulators and 51 different disclosure requirements, some being more specific than others.
Cavoli said LSI has had some general conversations with regulators about more “proscribed” regulations on disclosure but did not broach anything specifically. LSI introduced its report, he said, because the firm has been “disappointed with the pace of change” in the industry and is hoping to guide what could otherwise be the heavy hand of regulation.
“They have a sledgehammer,” he said of the states, “and they use it on every problem, even if things are generally going in the right direction.”
Given that companies are seeing the value of disclosure, however, Dalton suggested that the market may resolve the problem before the states take their swing at it.
“Don’t discount the market,” he said. “More and more, companies are growing more aware, and the market might dictate that you’d better do it this way.”