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.