The subprime meltdown and the precarious position of reinsurers are not the only pressures on the insurance market these days. According to W. Harold Petersen of Petersen International Underwriters, the advent of life settlements is putting pressure on life insurers. It doesn’t affect term life, he says, because the term in those cases is known and the reinsurance is contracted for the life of the term. But in the case of whole life and possibly annuities, it’s a different situation.
Reinsurance, says Petersen, is usually ceded on the basis of coinsurance. “When the reinsurer goes on the risk with ceding company,” he explains, it’s for the life of the policy–and it’s an unknown term until that policy ceases. What has changed that equation is the development of life settlements. Instead of ending at age 65 or 70 or “some age where those people say, ‘It’s no value, let’s walk away from it,’” he says, now “someone says, ‘Hey, sell it to a life settlement company!’” So now all those policies sold to a life settlement company “will be extended for the full course of that person’s life.”
There will also be repercussions, he adds, for the disability market, largely because “there are only two reinsurance companies active in that field.” In 1975, he says, 545 of the 1,100 life insurance companies writing business in the U.S. dispensed forms of disability insurance. That number has since dropped to 26.