The emergence of quantum physics shook up the world of relativity. (The main protagonists were Neils Bohr and Albert Einstein.)
This was a clash of two entirely different worlds: the small versus the large. Furthermore, quantum physics, unlike relativity, involved a fuzzy fog of probabilities; this caused Einstein’s famous remark that “God does not play dice.” Quantum physics also involved something even more amazing: instant “teleporting” over vast distances.
All of this has parallels to the world of life insurance settlements. Here is how:
The emergence of life settlements has shaken up the life insurance industry. Here, too, it’s a case of the small (individual policies) versus the large (the industry itself); and, like quantum physics, life settlements involve a fuzzy fog of probabilities.
Trying to teleport through the fog, I made inquiries to providers in the life settlement world; their answers, described below, were revealing.
So is the accompanying graph, which shows probabilities for a typical life settlement case (a 76-year-old nonsmoker male with numerous impairments). Note the large number of probabilities needed to describe the case. The “expectation of life,” a single number (11.35 years), is inadequate to describe it. Incidentally, this is the classical actuarial complete expectancy of life.
(Minor note: the expectation of life is not exactly the point where 50% of the deaths have occurred.)
It should be mentioned that there is an up and down confidence limit in play. The graph, which is based on averages, can’t convey that aspect of the fog of probabilities. Having considered the graph, let’s see what the life settlement experts had to say about their business.
Question: Is there a need to improve life evaluation methods?
Answer: Continued improvement is needed. For example, are wealthy individuals different? It will take 8-10 years before emerging results can be compared with current expectation of life estimates being made. In the meantime, can’t we see whether results are following the upslope in the early part of the graph? That would constitute confirmation.
Question: Are life settlements possible at lower ages?
Answer: Currently, life settlements are transacted at an average age around 75. It is felt that lower ages are possible, if there are significant impairments. At estimated life expectancies greater than 15 years, sufficient economics cannot be generated.
Question: Are life settlements possible at lower face amounts?
Answer: Currently, life settlements average perhaps $1 million in face amount. There is a huge untapped market below that level, especially under $200,000; furthermore, people having policies at the lower face amount “need the money more.” However, prevailing economics disfavor including them in life settlement transactions because of multiple layers of seller representation and complexity of the process. A simplified direct-to-consumer approach will be needed.
Question: What about the financial planning needs of senior settlement clients?
Answer: Because of significant reduction in private pension benefits, possible instability of Social Security and decreases in individual savings, life settlements provide a means to generate retirement income from other sources. Furthermore, life settlements, whether taken or not, have led to the evaluation of life insurance as a valuable asset in any financial planning analysis. This is a good thing in itself.
Question: What about regulation of the life settlement industry?
Answer: Responders feel that good uniform regulation is needed in all states. There should be reasonable barriers to entry, meaningful enforcement and transparency of compensation, they say.
Lifting the life settlement fog is an incremental process. Keep asking questions, and keep studying news, reports, graphs and the like. This industry is shaking things up in the life insurance sector, so it will take a while for clarity to emerge.
John M. Bragg, FSA, ACAS, MAAA, is actuarial consultant at Bragg Associates, Atlanta; past president of Society of Actuaries; and past CEO of Life Insurance Company of Georgia. His e-mail is email@example.com.