The third roundtable of life settlement executives sponsored by National Underwriter was held on Paradise Island in the Bahamas on Oct. 11, 2007, with representatives from 9 settlement provider and broker firms taking part in the discussion. As in past roundtables, this one was co-moderated by Doug Head, executive director of the Life Insurance Settlement Association, and Steve Piontek, editor-in-chief of National Underwriter.
STEVE PIONTEK: Hello everyone and welcome to the third National Underwriter Life Settlement Roundtable. Even in the short time since the last roundtable in March, so much seems to have changed regarding the settlement business. So, I’d like to start off the discussion with this question: Have we reached the tipping point in life settlements in terms of their acceptance?
JORDANA BALSAM: The industry is certainly not at the tipping point. It’s still in its infancy in a lot of ways, in my opinion. I definitely think that we have a long way to go, but I think we’ve come so far. What, two years ago, three years ago, even five years ago we were educating agents, telling them what a life insurance settlement is versus a viatical settlement. Everyone is aware of it now. So in that respect, we’re here and here to stay. And it’s going to change in the next couple years drastically. It’s changed drastically in the past couple of years.
MICHAEL COBEN: I think we’re in a unique time in the market. There’s been a lot of awareness because of the regulatory climate and the reaction the industry has had from carriers, but also from the acceptance level it’s had in the planning process. And that has all heightened to a point where the lights are on and now there’s just the opportunity to propel it forward. There’s a unique opportunity for each of us–whether it’s carrier involvement, buyer involvement, or broker involvement–to launch it. One of the things that we would like to see as an industry is cooperation for that to happen. If that cooperation happens, which it will, then what will benefit will be consumers’ greater access to more options. And the whole genesis of the life insurance industry was to give clients options for solutions, and what we’re doing as an industry is contributing to that. And once that recognition is there, which I think is starting, then it’s only going to propel forward.
DOUG HEAD: Over the past few years, I’ve seen a number of logs–I view them like an old “Dukes of Hazzard” chase where the bad guys are throwing logs off the back of the truck and the Dukes have to drive around. So we’ve had kind of a swerving-driving-around-the-logs history here. And opponents of the industry have repeatedly raised issues that may be sidebar issues, but they give them a couple months of noise and buzz. I sort of have the feeling that our association’s growth but also your companies’ growth as we see it in some of the reports and some of the numbers that we’re seeing have been such that there’s this almost inexorable movement toward further industry growth. So when Steve asks about tipping points, I think that one tipping point that has been achieved really, truly is, I think there was a long period of time when the question was out there would this industry survive at all. I think we have passed the point where that question can be asked anymore. We’re going to survive. We’re going to prosper.
Clearly one of the big pieces of news this year was the entry into the marketplace of insurers.
TED PRYOR: There is a tipping point coming along and it relates to the large institutions coming into the market. You know, spring of last year you didn’t hear much about major financial institutions putting money in; now you’re hearing that more and more. Last year versus this year you’re hearing financial institutions wanting to offer the product to their customers, perhaps fairly conservatively, perhaps not wanting to market it but at least make it available. So insurers entering the market…that’s very new and interesting. And then financial institutions wanting to offer it to their customers, that’s new.
MICHAEL COBEN: That’s a critical event for us because it says ‘we accept the market and we have to compete with it as well.’ That’s a very strong statement.
STEVE WASHINGTON: I think there was a lot of interest by carriers to be involved, but there was a great reluctance for any of them to step out of the pack. I think the Transamerica announcement was perhaps the tipping point and it’s to be seen where carriers end up. There will be a mix of responses. Some will go into it from the investment perspective; some will go into it perhaps setting up themselves as providers and a separate operation. So, it’s an unknown where that will end up, but I do think it’s a positive move. A foundation has been established; and from this, we can continue to grow as an industry. What’s also an interesting development that has occurred over the past year is that advisors have become much more aware of their fiduciary obligation to their clients to advise them about this option of life settlements where applicable. I think brokers, too, have also had a growing awareness of their fiduciary role as well in this market.
ROB HAYNIE: I was just going to make the comment that the quality of the competition we face on a daily basis has transformed itself. Some may perceive it to be ugly if a carrier gets involved. I don’t. I think the more people that come in that are better quality opponents, if you will, or competitors, will only make us stronger. A rising tide raises all boats.
STEVE PIONTEK: Can I just play devil’s advocate here. Does nobody have a sense of foreboding about something like Transamerica coming into the business?
RAMIRO RENCURRELL: I was going to pose the question: Does anybody feel threatened by the entrance of a carrier into the market and the ability of that carrier to retire their own policy?
JORDANA BALSAM: I think it actually adds credibility to this industry. A couple years ago…people were so worried about who’s buying these policies. Now it’s the banks. Investment banks are coming in and adding credibility. Transamerica, I think, will add even more value and credibility to legitimize the industry.
BRYAN FREEMAN: I think it’s great that all of these financial institutions are coming into the business. I think it’s extremely important to have insurance companies in the business for one really big reason: They’re compliance-oriented. They usually think about compliance first and then how they do their business is built on top of that. I think that’s what we’ve got to do, and those of us who have been in this a long time do put a lot of emphasis on compliance because without compliance we will have big problems in the future.
That being said, I think we find ourselves in the situation today where we’ve got two classes of people, or entities, in this business–the regulated and the unregulated. And what I mean by that is that we’ve gotten quite a number of entrants that have come into the business that don’t want to play by the rules and are looking for every exemption and loophole in the law to do business. So in some states, I would dare say that at least half or more of the transactions that are being done are being done without being transacted by a regulated entity. What I mean by that is people are using the accredited investor exemption in the definition of viator to claim that if they deal with a policy seller who would qualify as an accredited investor that they don’t have to have a license to buy the policy. So we see some people who are big investment banks and others, all types of institutions who have come into the market and claiming they can buy and compete with us without a license.
STEVE WASHINGTON: Some providers, too.
JIM CAVOLI: And that invites more scrutiny and more regulation, and so then it opens the door for things like 5-year bans because of the aggressive interpretation or actions in the marketplace by participants. So simpler, broader rules would be a good thing rather than a proliferation of very narrowly defined rules that you can find exceptions to all the time.
RICK JOHNSON: I think some of these carrier programs that we’ve heard about out there are based on making fair market value loans on the value of the policies.
MICHAEL COBEN: Obviously, the one thing that we do have to protect against is the potential use of regulation that carriers may try to push forward to their advantage and make it unfair for everybody else. An example would be for a carrier to change specific policy provisions within their contract to allow the right for a last offer, something like that…
DOUG HEAD: The Phoenix suggestion.
MICHAEL COBEN: Exactly.
STEVE WASHINGTON: I think regulators have been always leery of the Phoenix situation as well; but it was actually in some measure, because of the efforts of LISA that regulators became aware of the provisions being put into those contracts.
DOUG HEAD: I would be interested in hearing the views on what are the specific unfortunate things that could happen because of the entry of the insurance companies. They could clearly be buying out their own risk on the cheap, which would be damaging to consumers.
JIM CAVOLI: That is an advantage. They can have a market-clearing price with no risk, and they could retire an obligation; but as long as it’s open and competitive…
I represent sellers; so I don’t know that it’s that bad as long as there are other opportunities. If it turns into a market of one where they say “we’re just going to give you more than cash surrender value, but don’t go out and sell it,” that would be a bad thing. I think the competition that our industry brought to the value of policies is incredibly important. You know, hundreds and hundreds of millions of dollars value have been created because people go out and sell their policies. I’m less concerned about new buyers. There’s tons of buyers coming to market with tons of crazy investment return objectives or crazy low or crazy high. They’re all over the place. They would just be another entrant as long as they weren’t able to somehow, like Mike said, change provisions within their contract. Then it tips the rules, and that’s where the danger lies.
STEVE PIONTEK: So Transamerica gets into the business. Is it likely that they are going to accept policies from other insurers?
BRYAN FREEMAN: Sure.
STEVE PIONTEK: I think it’s an interesting development.
TED PRYOR: In our business, I have had two insurance companies in our office within the last 60 days setting up business and they want to buy policies. They’ve hired people, and they’re rolling.
DOUG HEAD: And for that operation, are they telling you that they plan to create a licensed entity as a provider or subsidiary to the company?
TED PRYOR: Actually, these are folks who are asking questions of us and trying to gather information. They’re building momentum. They’ve hired people and they’re doing their research. One of the questions they asked is, Do you think we should or shouldn’t? So they’re moving very quickly, but I don’t think they’ve answered that question affirmatively.
DOUG HEAD: I think one of the things that could tilt the playing field in the wrong direction is if the insurers are able to establish entities that operate in some way using the accredited investor exemption or some other way to not actually create a legitimate, regulated provider entity that is in the market and is doing filings and buying policies in the way we have traditionally thought about this industry being structured. There have been some suggestions that because of the existence of financing entities that really want to buy for their own portfolios or insurance companies that are going to buy for their own portfolios, that the provider concept may be antiquated or threatened or may have to change. I think it’s the industry association’s position that the provider concept needs to be there. It’s a good consumer protection. It is the proper structure for the industry. But can anybody conceptualize how the industry could exist without providers?
BRYAN FREEMAN: You may see providers become more vertically integrated so that you have providers that do their own life expectancy underwriting, just like insurers do, and have access to funds of an upstream owner of the provider that brings the money to the market. And I think that would be a good thing because the time it takes to do a settlement today is elongated just because of having to use third parties to do a whole lot of things. If we don’t keep a concept–you don’t have to call it a provider–but a regulated buyer in the business, we’re asking for a lot of problems. Go right back to the accredited investor exemption. I think that’s creating a lot of problems and would continue to create even more.
I don’t think that a lot of regulators actually even understand that they’re not regulating the business, they just have a law in their state. But a huge amount of the transactions just don’t fall under it, at least according to the people who are buying the policies. So we’ve got to have a structure of a regulated buyer; otherwise, there’s no order to the market of any kind.
JIM CAVOLI: I don’t know if the idea of a provider is antiquated or what, but as the industry matures, there’s going to have to be a streamlining of the market-making activities between buyers and sellers. Today, to make the market between a buyer and a seller, there’s just a pretty extensive layer of intermediaries. There are many, many helpers in the sale, as it were; it’s just grown out of circumstance. Investors who want to buy the policies just rent all the help from all these different specialized firms around the industry; and as volume grows and as investment levels grow and as the market consolidates, we’re going to see a streamlining of that. Regulation won’t drive that because regulation typically lags the market. And so it will be driven by buyers, vertical integration, that kind of thing. People are doing that today, and they’re starting to consolidate. You know, all the pieces are starting to attach themselves together; and I don’t know that that means there won’t be a provider, but there will be a market-maker of some kind.
STEVE PIONTEK: What link in the chain do you see as being more vulnerable?
JIM CAVOLI: They’re all sort of getting absorbed into one link as opposed to getting rid of links.
ROB HAYNIE: What’s happening is the market today is far more complex than it was 5 years ago with these helpers, these specialized firms. There are more opportunities to purchase today. Take for example, the newest thing that’s hit the marketplace, which is the small face policy. That’s something that we didn’t really have a market for a couple years ago; it was an afterthought, ‘hey, we can help you.’ But that’s a direction it’s taking because there are lots of different places to sell, with more and more buyers. It will sort itself out. I don’t think we make on a transaction as much as we used to make, but we do more transactions than we used to do. So I don’t necessarily think that’s a bad thing.
STEVE PIONTEK: What is the next log that’s going to be thrown in the road?
JIM CAVOLI: Securities regulation.
ROB HAYNIE: Securities regulation.
BRYAN FREEMAN: Accredited investor problems, wet paper.
ROB HAYNIE: Misinformation. There are many logs, but think of any other business. Think of life insurance in general. Logs have been coming at them for 170 years and there still coming. They’re big organizations, and they’re able to address them. It’s just the natural evolution of the business.
DOUG HEAD: We may now be at a point where in the coming year or two, if the NCOIL model is adopted and there is a calming effect and everybody can agree that it is appropriate they have regulated industry in the states–and that certainly has been LISA’s position–and the insurers come on board–cross your fingers–and don’t oppose the legislation because it doesn’t create a phenomenon that would bust the industry, we can look forward to more standardized legislation in more states. And I think nobody in this industry wants to see it more than the intermediaries you were talking about who all need ground rules to play by and structures to play within. The scariest part for many of us is not the mainstream part of the industry, but the new where an entity is going to get set up to buy policies completely outside of the regulatory structure, completely ignoring it and arguing that, for whatever reason, it’s not a regulated transaction. We have every reason to advocate for good legislation in the states because we have to head that off before those abuses become a public issue.
JORDANA BALSAM: I agree 100%, but I think it’s important that we advocate that regulation is pro-consumer. It has to be consumer friendly. This two-year contestability is all fine, but five-year contestability is not pro-consumer at all. Consumers should not have the right taken away from them to do whatever they want to do with their own salable assets. It’s their investment.
DOUG HEAD: I really, truly believe that the STOLI argument was a giant diversion.
TED PRYOR: A red herring, you mean.
DOUG HEAD: A red herring. A giant diversion from really the central issue that we’re advocating for, which is appropriate regulation and getting at the real problem. But there are some things that are not giant diversions, but could get to be, and one is the whole problem of whether or not insurers should be buying their own paper and in what way. I’m uncertain as to how we ought to be approaching that in the future.
BRYAN FREEMAN: Well, carriers should be able to buy their own paper just like anybody else. If they want to buy another carrier’s paper, fine; if they want to buy their own as long as there is a disclosure process and transparency in the process.
STEVE WASHINGTON: Well, and if they make it available for all of the –
MICHAEL COBEN: Free market.
STEVE WASHINGTON: It has to be universal to all of their policyholders. It can’t be selective.
STEVE PIONTEK: Let’s assume that they don’t want to go that way. I mean, they don’t want to make a level playing field.
ROB HAYNIE: But aren’t they kind of in a Chinese fingertrap, so to speak, in the sense that they really can’t buy one policy and not treat everybody the same–you really can’t prohibit them from buying their own. I don’t even see that as an argument. You’ve got to watch the tricks and the pitfalls.
TED PRYOR: What I see them doing is saying, ‘we’re the only ones who know how to buy policies properly, we’re the only ones you should trust because we’ve got compliance procedures that have been in place a long time.’ And then they’ll go to BGA or MGA or a big bank and say, ‘Don’t trust all those guys you’ve never heard of, just let us buy the policies.’ I think that will be very powerful for a while except for the buyers who can match them on compliance issues. That’s my sense, and that’s what I hear them saying: ‘trust us, don’t trust anybody else.’ That’s a fairly simple argument for an insurer to make.
STEVE PIONTEK: Well, it is in the sense that ‘you bought the policy from us, you trusted us enough at XYZ insurer to buy the policy, we know what’s best for you in terms of buying it back from you.’
JORDANA BALSAM: Then it comes down to what’s the reason for sale. Is the policy effective? Is it not as appropriate for them at this point?
STEVE PIONTEK: Don’t you think a carrier would say, ‘We understand your need for the policy is not the same as it was 10 or 7 years; here, I have something better for you right now.’
JORDANA BALSAM: Are they going to be competitive with the pricing that the settlement market could get?
JIM CAVOLI: He’s saying it will never get out there if the offer is made in the office of the agent right there at the XYZ office, ‘hey, look, we can get you this right here, it’s better than your cash surrender.’.
MICHAEL COBEN: What you’re talking about is conservation activity, which we see from carriers all the time where they’re offering other types of policies, other options. But the issue is they can’t discriminate. They have to offer it to a wide audience. I think carriers are interested in this market, first, obviously, to protect against what we’re talking about, a siege on their lapse ratios, in other words; but they’re also interested for another reason. They’re interested in alternative investments. The carriers are looking for stable value investments. They have a lot of cash in the market. The bond markets aren’t necessarily a great place. The stock market may not be a great place. This is a very stable value investment. They look at this as an alternative. So you have big conglomerates where one side of the house is interested in investments and the other side may be particularly interested in policy performance. They’re going to do what’s best for the company itself, and maybe they’re going to have infighting within the carrier itself. But that’s reality.
BRYAN FREEMAN: The thing that concerns me about creating a level playing field of all the competitors out there is that when you draft model language for law and you don’t fully vet what you’re doing in such a way as to really understand how it’s going to remake the market, you usually create some unintended consequences. For example–and I hate to bring this up again–but look at the accredited investor exemption. When they put that in 5, 7 years ago, nobody ever thought that people would use it as a wholesale business model to be unregulated. The same thing is true about some agents claiming that they don’t need to be licensed because they didn’t negotiate between providers, they can send it to a broker. So they say, ‘We don’t need to have a license.’ You’ve got all these people who are running around looking for an edge over somebody else; and usually the edge is ‘we don’t want any oversight over us.’ You know, we’ve had companies come from out of country and say they could buy United States policies because they were domiciled in Canada. Well, those are the kind of things that bother me about how we’re going to go forward and create a level playing field in the industry. The bottom line is if you’re in this business, if you’re buying policies, you’ve got to be regulated.
STEVE WASHINGTON: More than half the states are regulated currently; but we will see over the next two, three years many more states come on line with regulation of life settlements. Agreed that legislation is never a perfect exercise; but, to address your particular concern about accredited investors, that is out of both the NAIC and NCOIL model. And a lot of states understand that now and are not going to allow that exemption to exist.
RAMIRO RENCURRELL: What’s important to think about is it’s not just what the law says but the intent of the law. At the time those laws were written, what was the intent and what is the consequence today of that intent. Maybe that was appropriate back then when it was written, but now it’s not appropriate and it wasn’t the intention of the law to be a loophole.
DOUG HEAD: Given all of the problems with the regulatory approach, is there an approach that can be taken by the industry to begin to set standards for itself that might get real adherence? Is there a self-regulating solution?
JIM CAVOLI: The fact that we don’t have or have very limited adherence to any that have been proposed is the reason that we have all of these well-intentioned attempts by the regulators. There’s a lot that needs to happen to standardize or streamline the transaction. Those of us who execute these transactions every day find them very difficult to do, and they’ve gotten more so in the last 12 months than at any time before. The need for the buyers to assure themselves of a quality asset has increased dramatically. The state actions and the attorneys general actions have created among buyers a heightened awareness of the quality of the assets they buy; so they’re asking for more and better quality due diligence materials. And it’s a moving target because every buyer has a different legal advisor and a different standard of quality they’re looking for. And those of us who are trying to sell to multiple buyers find it very difficult.
STEVE WASHINGTON: I don’t think that you’re going to find that industry standards will fly unless and until it’s not competitively disadvantageous. That’s the problem at the moment. To adhere to a standard–it’s like the accredited investor exemption. There are certain providers like us that won’t use that, quote, exemption; but…
RAMIRO RENCURRELL: Because you understand the intent.
STEVE WASHINGTON: Exactly. And we don’t think it was intended that way. Others don’t and that puts them at a competitive advantage.
DOUG HEAD: What about having LISA publish the standards or publish best practices? That’s the magic word.
RAMIRO RENCURRELL: I would caution the word “standards” because standards imply that there’s some authority over the standard. But LISA, as an association, has no authority over the standards. It can set best practices. It can publish what we find is good and is bad in the industry–whatever the best practices we find. But in order to set standards, you have to be able to enforce them; and in order to enforce them, you need the authority.
JIM CAVOLI: The only authority you have is to, what, pull membership rights.
TED PRYOR: I don’t know whether LISA has the right to do it, although it may be able to. I’d like to echo the streamlining concept. If every provider, just as an example, used all the same documents, that would streamline the process dramatically.
JORDANA BALSAM: I agree.
TED PRYOR: I don’t know how you get there, but other industries have done it.
JORDANA BALSAM: The standards are those of us who glue it all together. It’s such a complicated process. There are so many parties involved from the consumer end, the trustees, the attorneys, the beneficiaries, the owner, the insured. There are so many parties that if you don’t have some sort of overseeing standard, then it’s just chaos.
DOUG HEAD: So one of the things LISA can be working toward is best practices.
ROB HAYNIE: Or take it the one step further. I know when I served on the board we had discussions about becoming a self-regulated organization, which you may think is impossible. But the reality is–I’ll make a prediction now–in 10 years you probably will be. You’ll probably be forced to be. And you’ll probably want to be because if you’re not somebody else will be. Whether you standardize forms or whatever, I was making the comment that the process is not going to get easier, it’s going to get more complicated.
JIM CAVOLI: Two quick things though. Standardization, that’s a big thing to bite off. I don’t know if that’s achievable. But a superset of materials would be achievable. There are some things that Bryan’s company might want, some things that Mike’s company might want; but between them there’s an 80% overlap. And if I could get 10 things and send them to both of them, then they’d each have enough to finish a transaction. Maybe it’s a step short of standard, but it’s a useful role LISA could play.
The big challenge here comes back to what I said before about the quality of the asset being purchased. At the end of the day, the buyer of the policy has to have some assurance that there will, in fact, be a death benefit some day after making these premium payments. It’s the fundamental reason they buy the policy. There is no shortage of ways to worry about whether or not that asset is a quality asset. In my wildest dreams, it would be nice if there was some way to say, yes, this is a good one, if you buy it this way and you make those payments, that’s a death benefit.
STEVE PIONTEK: This phrase “quality asset.” What is a quality asset in a life settlement?
JIM CAVOLI: A quality asset would be a life insurance policy that is sold well so it can’t be contested by the life insurance company when a claim is made.
RAMIRO RENCURRELL: Or by the prior owner.
JIM CAVOLI: Or by a beneficiary or an ex-wife. There are so many attachments to a policy and participants in a policy that you need to make sure there aren’t a bunch of residual claims a few years down the road when a death occurs.
DOUG HEAD: So the buyers are seeking a clean –
JIM CAVOLI: A clean purchase.
DOUG HEAD: One of the things raised in our brokers summit a couple of weeks ago was the extraordinary difficulty consumers and brokers are having not in arriving at a price point for a policy, but post determination…
ROB HAYNIE: Post auction.
DOUG HEAD: The post auction, the closing, is becoming a longer and longer and longer process. Why?
TED PRYOR: I just want to throw a statistic in. We’ve kept track of every deal we’ve ever done and how long it takes to close from the moment buyer and seller agree, the day the award is made, both parties are happy with the price, the fees, etc., to when money actually changes hands. In our shop it’s 73 days and that is a long time when it’s an asset sale.
And it varies a lot in terms of which provider you’re dealing with. With some providers our average is 30 or 40 days and with other providers it’s 80 or 90 days.
RAMIRO RENCURRELL: It’s not the provider. It’s the financing entity.
MICHAEL COBEN: I think the issue comes down to experience. You have different levels of experience in the marketplace right now. As the market continues to mature and earn capital, you’ll see experience and look at performance and models–the efficiency will be there. I also think it’s our job in working with the advisors, working with their clients, to help them set proper expectations, to understand that this market is going to be a little bit more complicated and that they understand the process, and when they sign the paper, they understand there may be nuances that come up and to help them through that process. Unfortunately, those expectations aren’t set properly and they want to know where their check is.
JORDANA BALSAM: I agree 100% on that because I’m hearing it from the consumer end as well. ‘What do you mean? I signed the documents two weeks ago.’ There are so many parties involved. But Ramiro, to your point, the financing end, they don’t understand that there are so many layers involved. I’m not talking about the provider and the broker. I’m talking about the trustees, the attorneys, the CPAs.
DOUG HEAD: What stretches out this process?
RAMIRO RENCURRELL: Let me clarify a few points. In today’s market, the financing entities are large institutional funds. These funds are securitized and, the important word here is, rated. The rating agencies are setting the standards for that securitization, which means that when you go through a closing you need that…
DOUG HEAD: Not just best practices but standards.
RAMIRO RENCURRELL: Standards. You need that extra LE. You need that extra illustration. You need that LOC. You need all these other documents that weren’t necessary before because a lot of these deals–back in the medical escrow days–these were handshakes.
ROB HAYNIE: You could close in a week.
RAMIRO RENCURRELL: Nowadays, you need those extra forms. And it’s not even the financing entities that are setting them. It’s important that the broker community know and set the expectations, like Mike said, because it’s going to happen and it’s going to continue to get more and more complicated as we go forward because that asset cannot be impaired. If it’s going to be rated and there’s going to be an opinion on that securitized asset, it cannot be impaired.
JIM CAVOLI: But then for each securitization, there should be –
RAMIRO RENCURRELL: There’s a setup process.
JIM CAVOLI: There’s a setup. Show them to us. We’ll do it.
JORDANA BALSAM: Right. And that will help us in our education process.
DOUG HEAD: The complaint, as I understand it, is that the information is not asked for prior to the auction.
RAMIRO RENCURRELL: And that is the efficiency of the provider. The provider must understand his client, which is the financing entity. The provider must understand the rating and the securitization process of that portfolio. And they need to tell the broker right upfront, one time only, this is your deficiency list from this closing, give it to me once. Now, is it an efficient process? No. Is it getting better? Yes. It’s market evolution.
JORDANA BALSAM: I think it depends on which provider because I think there are plenty of providers that have got it together. You get them the cleanup list, they have it right away. Money is in escrow, ready to go. Then there are those providers that have been around a long time. It’s not a matter of how big they are. It’s just a matter of their closing process. There are so many cooks in the kitchen. There are too many people asking for that same illustration.
JIM CAVOLI: We’re finding it’s become now more the buyer than the provider because we can work with the same provider and have two extremely different closings because one went to this fund, one went to that fund. The challenge is being able to set those expectations; and it’s hard when the last time we sold one to you we didn’t need this, but this time we do. I understand why, but trying to figure that out earlier in the process is a good thing.
MICHAEL COBEN: To put this in perspective, it’s no different than if I’m an insurance agent and I’m accessing one carrier versus another. They have different underwriting requirements, different standards, different reinsurers that come back asking for different items. It’s called serial underwriting and that happens in that part of the industry. The other thing is you could be the hottest carrier with the best price but take 3 months to issue a policy. What we’re experiencing in our marketplace is no different in terms of the growing pains of firms building infrastructure and being prepared to handle the marketplace.
STEVE WASHINGTON: To me, it’s evolution and it’s a continual process.
STEVE PIONTEK: What I’m hearing here is something that seems to be getting increasingly complicated and yet there’s this yearning for standards, best practices. Where do you see these two things coming together and how are they going to work out?
RAMIRO RENCURRELL: The market always works itself out as we learn, as we evolve. It is getting more sophisticated, more complex. There’s no doubt about that in my mind at all, but I do see it correcting itself.
BRYAN FREEMAN: Here’s another issue. We’re seeing most brokers being incorrectly licensed. For instance, they’ll get their license in their individual name, but they transact business as ABC, Inc., and so they’ve got their ABC, Inc., but ABC, Inc., doesn’t have a license. And a lot of them want to argue with us that we’re not right. Well, if you do business in a regulated industry under a trade name or a corporate name, you’ve got to have it licensed in most states. There may be one or two exceptions to that, but in most states that’s true.
DOUG HEAD: Well, uniform producer licensing is something the NAIC has been wrestling with for the last 10 years; and I think it’s come a long way. But obviously, bringing it into our arena is an important thing for us to continue to work on.
DOUG HEAD: We’ve talked about growth today, but how much growth are we going to see? Is there some segment and direction that the growth is going to occur? Are there more policies that involve premium finance that are coming into the market today then there were two years ago?
One recent estimate that I saw indicated growth would be 10% over the next few years; and that strikes me as a very small and inaccurate number. My general sense is that growth is much higher than that. How many people think it might be more than 25% per year?
RAMIRO RENCURRELL: I think it’s bigger than that.
STEVE PIONTEK: To get on a different tack, are there still firms taking nonrecourse premium finance policies? In terms of best practices, what’s LISA’s stand on that?
RAMIRO RENCURRELL: The policy owner has to have the option to keep his or her policy. That is a proper finance program; and if they don’t have the option to keep their policy, then that’s the nonrecourse that financing agencies are not touching.
DOUG HEAD: I think we’re making an effort to drill down. I think all companies are making an effort to fully understand the circumstances under which policies were originated. And if policies are improperly originated, there are some marks of that we all recognize, and that are recognized, in fact, in the proposals we’ve made to the NAIC and NCOIL over the years to try to identify this.
RAMIRO RENCURRELL: We re-underwrite. Most providers re-underwrite the policy at the time of issue and make sure that insurable interest was there, make sure the policy was properly issued, that no fraud was committed. So we do test for that.
STEVE PIONTEK: What if it’s an organization you find was consistently buying those policies? Would you throw them out?
DOUG HEAD: We don’t have a disciplinary methodology.
TED PRYOR: I think you’re going down the wrong path here. I mean, about half of the buyers that we deal with buy some premium financed product and about half simply don’t buy it. And the ones that do buy it buy it selectively, typically reviewing specific programs out there, getting legal opinions, doing the research upfront and then analyzing each new policy as it comes in to see if it matches the original. And the bigger programs seem to be able to sell to those kinds of buyers who are willing to do the extra spade work to understand whether the program was put together properly in the state. A program that might be not a proper program in New York might be fine in California because the law is different. That’s highly relevant–what the laws of the state were and whether it was properly issued, not someone’s perspective on how it should be structured or not structured. So the buyers who are doing it, as far as I know, are highly sophisticated and putting extra time in to understand the programs in order to be able to buy them.
DOUG HEAD: Are these buyers providers?
TED PRYOR: Yes.
DOUG HEAD: As licensed providers wouldn’t they fall under the requirement for fraud programs to detect improperly obtained policies?
TED PRYOR: Absolutely.
DOUG HEAD: So really nobody is buying anything that is improperly originated.
TED PRYOR: Not that I know of.
MICHAEL COBEN: Going back to the original question, how big is this market and how big will it get, we’re very bullish, obviously, because of the investment we’ve made in the market and the industry and our firm itself. I think it goes back to about three or four points.
One is: The capital in the marketplace is still very interested in this asset. The demonstration of that is the life settlement conference in Orlando. Capital was walking all over and bumping into themselves, and it’s either to investigate the market because they’re kind of curious or they’re ready to engage in the market and they’re looking for partners. What I took out of the conference more than anything else, is how much Wall Street and different types of institutional investors were there investigating the market.
Two is: We haven’t even hit maximum penetration distribution. We’re talking about a marketplace that has permanently had access to policy owners through independent agents. But there’s still access to policies through CPAs, estate planning attorneys, trust officers, the wirehouses. There’s a huge access to the market that still hasn’t been tapped, so that talks about potential. We’re now looking at different types of policies as an industry; and it’s going to go into other mortality-based products like annuities and longevity annuities. So the application there is phenomenal. And I think it all stems from education because you have to educate the people who are working directly with the client and you have to educate the capital sources. Part of what we’re wrestling with in this industry is how to facilitate that education on all ends.
So there are many factors that point towards exponential growth in this marketplace, and I think it’s unlimited in terms of the opportunity.
DOUG HEAD: Surely more than 10%.
MICHAEL COBEN: Yes, because you look at plotting its historical numbers and how many billions of dollars of insurance sold to people above the age 65, and the population is continuing to grow in that sector. Capital is becoming more sophisticated because they’re able to look at a broader spectrum of product line. In other words, historically two, three years ago you were only looking at life expectancies up to 10 years. Now you have providers with institutional partners that can go out 21 years. What does that mean? It means a broader base of planning can be done. A younger life can go through a planning option that typically the older, impaired client looked at two, three years ago. So the application is broadened too.
STEVE WASHINGTON: I think, too, another factor is that the industry is 7 or 8 years old. In a couple of more years we’ll have a good 10 years of experience with, say, life expectancy; and that will also, I think, stabilize the industry because more institutional investors will have a track record to look at.
RICK JOHNSON: One other factor, too, is that you have the entrance into the market of a number of funders that are buying small face policies. They’re going after a previously untapped market. We believe it’s going to have a domino effect on the growth of the market because it’s going to open up a previously untapped market segment of seniors with lower face policies. They’re going to be educated about the fact that they can sell their life insurance in a settlement, and that’s going to continue to make this industry grow. Once consumer awareness is out there, that will open up the opportunity for directed consumer campaigns and education campaigns; and potential for the growth is endless.
STEVE WASHINGTON: To that point, though, I don’t think we’re looking at unlimited market. The fact is that this will grow, but at some point it will plateau and then it will stabilize. But it’s not the sky is the limit here.
MICHAEL COBEN: We’re not talking about access to the trillions of dollars of insurance. We’re talking about a segment of the marketplace, rather than the marketplace as a whole.
STEVE PIONTEK: Does LISA have an information pooling mechanism? Do members talk about or report their business? Or is that a sore point?
RAMIRO RENCURRELL: We tried, but most of the members don’t contribute the information.
STEVE PIONTEK: Why?
RAMIRO RENCURRELL: Proprietary. We’ve tried several times to gather that data and very few people actually provide it.
DOUG HEAD: What impact are we going to see from securities regulators on this industry?
JIM CAVOLI: I think it’s growing. They’re already here.
DOUG HEAD: Maybe I can just clarify that. I am acutely aware that FINRA, the former NASD, has an interest primarily because they perceive it as a growth segment and then they can get a piece of the revenue. But what about SEC or others?
TED PRYOR: I think the impact is going to be important not so much because the securities industry is going to want to come in and regulate but because people who are already regulated and want to offer the product to their customers and are used to being regulated, they’re used to following securities laws, and they want to continue to do that whether it applies or not. So big broker-dealers are looking to get into it and we’re finding ourselves having to address their needs whether the laws apply directly or not.
STEVE WASHINGTON: I think the question of the impact of securities regulators will depend on how good a job we do at explaining to them this industry because I think part of the issue is that many of these regulators have a memory of this industry when it was a viatical industry, and there were many problems in that era. The industry has evolved significantly since that point; and we really have an obligation to get out in front of the regulators to explain what’s going on and how this market works today so they don’t regulate us inappropriately.
MICHAEL COBEN: I think that’s right on because a lot of firms still didn’t understand the difference between the front end and the back end of the transaction, and we would talk to them about the registered reps getting involved in the settlement business and you have to sit down and say let’s start all over again. Many of our firms here have an education process specifically geared towards broker-dealers and compliance officers and the market officers. So they really don’t understand the market.
DOUG HEAD: What are the key elements that we need to convey to the broker-dealers in that education process? What are the really key issues that they’re worried about?
MICHAEL COBEN: Broker-dealers are worried about liability. One of the ironic issues is that if they don’t allow their registered reps access to the market they may be incurring liability themselves because they’re putting an obstacle in place for their registered reps to do what’s best for the client.
RAMIRO RENCURRELL: I think they’re beginning to realize that.
MICHAEL COBEN: But also, just like any other financial instrument, suitability, best execution–
STEVE WASHINGTON: Supervision.
MICHAEL COBEN: All the generic things that are involved in what they deal with every day, they’re trying to apply to our business, some of which is appropriate and some isn’t. And we have to help them through that process. They’ll want to know background of the firm. One of the things that would be helpful is if there’s some standardized format that could be answered by brokers and providers to the broker-dealers. You know, we get requests every day from our broker-dealers saying we need information about and please fill out this questionnaire. It could be totally different than what another broker-dealer sends us. If they’re interested in regulating, maybe they should have a standard form that was required to appease their concerns.
TED PRYOR: Or maybe LISA could help organize a standard format for delivering, let’s say, provider or broker information to a B-D in a standardized form.
DOUG HEAD: We do have under way an effort to reach out to FINRA, to try to at least open up the lines of communication a little bit more. The sense that I got is that FINRA may feel highly constrained by not having any clear direction from the SEC and they’re groping in the dark and maybe we can help them to the right outcome.
BRYAN FREEMAN: Well, we’ve done fairly well with the state securities divisions.
DOUG HEAD: I think that the state securities regulators feel very strongly that they do not belong in the front end of this marketplace, the initial policy sale. They’re very, very deeply concerned about private sales to private investors, which continues to be, as much as it flabbergasts me, a situation that I still see minor press stories about.
STEVE WASHINGTON: Well, I think they are actually very territorial about their turf, about their securities domain because they have experienced and are concerned about insurance carriers who have securities products, but do not want to be regulated as securities products. So I think they do jealously guard their domain; and we’ve been fortunate to have securities regulators participate in the NCOIL process, reviewing the provisions of NCOIL’s own current proposed model act so that we can make sure the model does not contain provisions which are really not appropriate to be included within any insurance code of states that would adopt NCOIL’s model act.
STEVE PIONTEK: In one sense, standard or uniform regulation in a state-based system is kind of a pipe dream. I mean, NAIC just said that since 1996 only three model laws have been adopted in more than a majority of the states.
STEVE WASHINGTON: And I think the irony of the NAIC process is that it will probably lead to a great diversity of statutes being adopted across the states because you’re going to have NCOIL’s model act and the NAIC’s model act. Both are dueling models in the states, and some states will either adopt one or the other. Some states will adopt some combination. So you’re going to have a greater compliance cost as this industry goes forward because you will have different regimes applying in different states.
BRYAN FREEMAN: You’re right, it will accelerate.
DOUG HEAD: There are an awful lot of rules out there about the use of electronic communication and how records can be moved around. Are there deficiencies or problems emerging related to electronic exchanges of information? I keep hearing about the length of time that it takes to get life expectancy for you all has come way down in the last year and a half.
JORDANA BALSAM: It’s quicker than it was 3 years ago. It’s not next-day service.
DOUG HEAD: Are there other deficiencies we’re failing to realize in the industry that we ought to be looking at?
TED PRYOR: One example, Doug, in my experience, is the data on an individual gets typed in three times, once when the application is filled out by the agent, again when we put it into our system, and then a third time when the provider puts it into their system, and maybe a fourth time when it goes to the financiers. If a Social Security number gets transposed in there somewhere and you end up finding it out late in the transaction, now you’ve got to go back to the 75-year-old and get proof of their Social Security number because the transaction is not going to go anywhere until you resolve that issue. The whole transaction stops, sometimes for weeks, because of a simple data transcription issue. So if we could find a way to communicate that kind of simple data all the way through the process, I’m sure it would improve our transaction flow by 10% or 20%, transactions that get screwed up just because of bad data somewhere along the line.
STEVE PIONTEK: To an outsider, it sounds like the business is becoming more complicated.
JORDANA BALSAM: The complications are being addressed.
STEVE WASHINGTON: You call it more complicated, but it’s actually going to benefit the growth of this industry and its maturation and wider acceptance, and also help towards the greater sophistication of this marketplace. That’s going to be to the benefit of institutional investors driving it to and for consumers. You know, it will be a more protected market. It would mean providing greater protection to consumers, even though they are actually getting under current regulation a fair amount of protection. I think with improved standards there will be more.
ROB HAYNIE: And that sophistication is the exact reason why the big Wall Street firms and the big banks are in our business– because it is complicated and it appears like we’re dotting our I’s an crossing our T’s.
MICHAEL COBEN: We’re just going through different checkpoints in different stages of growth in the industry, just like any other industry would have to go through checkpoints. We’re no different than what we’ve seen in other industries.
STEVE PIONTEK: Listening to this conversation and everybody’s willingness to do the best, I think that’s really a strong thing, this impulse to self-police. But where are the teeth coming from that are going to make it really a great story in the public eye? Where is the enforcement for it? So that it’s not just the participants in the life settlement business saying we’re policing ourselves, but there are teeth to back up the good conduct that you all are advocating. That, it seems to me, is really the central question here.
ROB HAYNIE: You can almost use the school of hard knocks because the self-policing thing takes care of itself. You either self-police and act properly and obey the rules and market conduct, best practices, whatever you want to call it, or you will not be in the market simply because you won’t be able to compete.
JORDANA BALSAM: It’s survival of the fittest. It’s that simple.
TED PRYOR: Customers are going to demand compliance. They’re going to demand behavior. They may not know exactly what that means right at this stage, but we can help them individually as firms explain what good compliance is. The industry association promotes what good compliance is. The bigger firms, not just an individual agent trying to get a deal done, but the firms they work for are the enforcers because they won’t associate with firms that aren’t up to that speed.
STEVE WASHINGTON: I think the self-policing concept only goes so far. Steve, to address your question about what are the teeth, they will be, one, advocating for regulation in states that are not regulated and advocating for improved regulation in the states that do actually currently regulate. And then the second sort of piece will be, again, the role institutional investors will play in demanding certain standards of performance. Those two things will drive things far greater than self-policing, although self-policing does have a role. I think those two things are really going to be the drivers over the conduct of the participants in this market.
MICHAEL COBEN: I think there has to be cooperation between the different parties involved. I would love to see a day when carriers can sit down with the settlement industry, can sit down with regulators and say ‘let’s figure out how we can coexist. We’re all here for one reason. There’s value to the consumer. You provide value and we do as well. Let’s figure out how to get this done.’ I don’t think that day is too far.
STEVE WASHINGTON: That may be. For instance, in the NCOIL model act, one item that’s included is a provision that’s intended to permit insurers to ask appropriate questions about applicants for policies. So I think that we’re trying to get to that point where we can satisfy concerns of carriers all the while permitting this marketplace to exist and to function in a rational way.
JIM CAVOLI: Steve, is your perception, though, that absent some kind of self-policing body like an NASD, the rest of the world looks in and says, ‘hmm, I’m not so sure’?
STEVE PIONTEK: Well, my perception is based on the fact that I believe only a tiny fraction of agents, for instance, engage in unsuitable conduct with seniors. Yet it covers everybody. So you have a few bad players in this business. Where are the teeth?
JORDANA BALSAM: Isn’t that why we’re here? Aren’t we the teeth? Aren’t we conveying to your readers what we’re doing? I mean, it’s a growing pain. It is a growth process. But we’re doing the right things. We’ve come so far, but we have a lot of work to do. That’s why we’re here.
ROB HAYNIE: The teeth will come. Whether we become an SRO or whether someone else does it, the teeth are coming. There’s teeth now, believe me. There’s things that you have to do to participate in this market–it’s not an inexpensive thing that it used to be.
RICK JOHNSON: I think Steve makes an important point. Advocating for well thought out and reasoned legislation in states that don’t currently have any regulation and cleaning up the legislation that’s currently in existence, plus enforcement by the regulators, I think that’s the simple answer to this question. There are the teeth. You can bring it a lot more legitimacy to the issues that you’re talking about if that’s advocated for and completed.
TED PRYOR: One thing about the legislation, though, is that a lot of these states have laws but no people to enforce them. So just putting in the legislation in various states that we all adhere to doesn’t necessarily cover it. The state of Connecticut doesn’t have anybody running around checking brokers’ licenses, that kind of thing. Everybody is registered there, so they have some information; but there’s no real spine to it unless it tips over to being an illegal activity.
STEVE PIONTEK: It’s time to go around the table and have everybody give a summing-up comment if they want.
JIM CAVOLI: Clearly the market is growing, maturing. It’s becoming a more accepted and better understood transaction every day; and as that happens, the market itself is attracting better and better participants and driving out marginal players. There will always be regulatory hurdles for the industry. As the newspapers print stories, regulators will react. That’s just the nature of being a regulated industry. I think some of the big changes that will be coming will be the emergence of securities regulators and that they will begin to make their presence more, not less, felt in the industry. And I think that there will be a streamlining or a vertical integration of the intermediaries in this process. I don’t believe that two or three or four years down the road there will be as many intermediaries or separate company intermediaries involved in every transaction.
BRYAN FREEMAN: I think as people learn what the business is really all about and the regulatory regime that already wraps around it and begin to understand how they fit in it that we’ll be a lot better off and we’ll have kind of a level playing field that an industry needs to really grow.
RICK JOHNSON: I think the next several years we’re going to see continued growth in the industry. We’re going to see growing consumer awareness, just like we’ve seen agent and financial planner awareness grow over the past several years. We’re going to eventually have acceptance of full disclosure of fees and commissions. I think we’re going to move towards a standard of privacy protection for medical records perhaps even developing a standard where folks are just known by a case number instead of their names. I also think we’re going to see the development of some sort of integrated CRM or technology platform that brokers, providers, agents can all be on the same database sharing platform rather than logging on to other individual websites to get that information. I think the outlook for the market is great.
JORDANA BALSAM: I’ll say it again because I truly believe this. I’m an advocate for the consumer. Regulation is great. Bring it on. As long as regulation protects the interests of the consumer, I think we’re in a good spot. At the end of the day, it’s all about getting the most value for an insured’s insurance policy. I think we have a lot of growing to do, but we’ve come very far.
RAMIRO RENCURRELL: I agree with those comments. I think the market from what it was two or three years ago to what it is today has evolved significantly. The market players are more sophisticated; the investors are more sophisticated. Even the sellers and the brokers are more sophisticated. So I see this becoming a more and more professional area and where our expertise will help the business grow and grow in a manner that it should, properly regulated. I agree with you that we need to protect the consumers, but we also need to protect the investors.
JORDANA BALSAM: It could be one in the same.
ROB HAYNIE: Short comment is that each and every time we sit at this table and come to LISA meetings, the future continues to look even brighter. In spite of some negative things that have happened, there have been way more positive. More and more sophisticated individuals are getting into the marketplace. And I encourage more people to get involved in our business. At the end of the day, the consumer will benefit even more.
MICHAEL COBEN: We provide a tremendous value to consumers, and as long as we continue to provide that value, our industry will grow. We do have a commitment and that is education. The education piece is critical for all interested parties.
TED PRYOR: Whenever I have a tiring day, I hark back to the fact that we’re on the right side of the consumer, and some of these issues that we worry about we get through because we’re benefiting the consumer. In our business, we generate millions and millions of dollars of extra cash for seniors that they didn’t know they had. It’s a good phone call to be able to make whether it’s us making the call or a broker making the call. Our average is 300% of cash surrender value. It’s not 10% or 20%. It’s huge incremental dollar amounts that are available to them when they decide to sell a policy. This is a transaction where they’re in control. They can sell or not sell. We’re not forcing any of our clients to do anything. So if we can just stay the course and stay on that high road, we’ll be able to fend off the critics.
The second thing is huge institutions are getting into the business as buyers and as entities that want to make the product available to their clients. That’s a very positive thing. I think that two, three, four, five years from now the market will look very different because of the professionalization of the business.
DOUG HEAD: We’re out of the back woods and the log trails and the bumpy roads and we’re onto the super highways of tomorrow and things will just keep getting better.
STEVE PIONTEK: I really have enjoyed this Round Table. I think it really was very substantive and will give our readers a very good picture of not only where the business is going but of your feelings about the business, which I think is really a crucial thing to get across, that — the well-intentioned aspect of the major participants in the business is really is like a huge wave. It can carry many, many ships. And I think with that kind of impulse continuing, the future of this business really is unimaginable right now. I think compared to where it is now, when you have this conversation five years from now, you’ll be talking about even much greater horizons.
Thank you all for coming and participating in this.