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Underwriting For Settlements Has Challenges

By Matt Brady

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Evaluating an insured for a life settlement involves distinct challenges, forcing an underwriter to look at the policyholder in a distinctly different, and sometimes opposite way as has been traditionally done for life insurance policies, according to the medical director of an evaluation company.

Speaking at the National Underwriter Life Settlement Summit here, Dr. Linda Goodwin of Examination Management Services, Inc., noted that underwriters for life settlements start out with a distinct disadvantage.

“You get medical records,” and other documents, she noted, but “usually you can’t ask for anything current,” as an underwriter could of a life policy applicant.

In some cases, she said, an underwriter can include a proviso in the arrangement that if the seller of the policy provides new information regarding their health then it could result in a more competitive offer, “but not always.”

Life settlement underwriters, she said, are also generally not given information about the initial purchase of the coverage, such as the value or initial price of the coverage.

Life settlements have changed the way the senior population is viewed by underwriters, according to Goodwin, in that they have brought a senior population that had been largely ignored as uninsurable into the field.

Ageism, she said, can also play a role. As an example, she noted that cancer studies have traditionally had a cutoff age of 65, despite the fact that a majority of cancer cases involve senior patients.

Studies in general are based on chronological rather than biological age, she said, adding that seniors at the same age can be vastly different in condition. A population of one-year olds will be generally equally healthy, she said, but an equal population of 85-year olds would be far more heterogeneous.

Instead of seeing the population as simply “seniors,” she said underwriters now look at them as three distinct groups of those between 65 and 74, those 74 to 84 and those who are older than 85.

“Those are very different groups,” she said. In the past, however, “they figured if you’re old, you must be sick, and if you’re really old, you’re pretty much dead.”

This can be a concern for life settlement companies because underwriters working with that traditional mindset may see more value in an insured than is actually there, she said, which could result in “excessively aggressive” bids.

Life settlements also have a focus that runs counter to the way in which most underwriters have been trained to gauge life insurance, Goodwin said.

As an example, she noted that underwriters evaluating a life insurance applicant may find the mortality ratio associated with a certain condition as ruling that applicant out for coverage, while with life settlements, “there is no limit to the mortality ratios,” that would be accepted.

Such cases, she said, present challenges to life settlement underwriters with which they may not have any experience.

“Many impairments that would be totally uninsurable for life insurance are seen in life settlements,” she said, adding that underwriters “don’t know how to handle” something like widespread cancer.

But while life settlement underwriting is still developing, a study conducted by Washington-based Life Policy Dynamics found that settlement underwriters are becoming more consistent.

The study was of 589 policies involved in settlement transactions in 2007, said J. Mark Goode, CEO of Secondary Life Capital, which founded Life Policy Dynamics to establish a data center for the secondary market. One company evaluated nearly all of the policies involved, and the other 3 companies measured evaluated at least 170 of those.

Two of those companies had been measured for their transaction in 2006 as well, and Goode said the study found both had closed the differential between them.

“This is very good for our marketplace,” he said, explaining that a smaller differential between underwriting firms will “level the field” for market participants and help to eliminate instances where a company tries to compete through differing life expectancy reports.

More consistent and accurate underwriting is a major issue for settlement companies, Goode said, because they can have a drastic result on the value of a portfolio and ultimately the bottom line.

“There’s no more substantial risk factor in this business than mortality risk,” he said, referring to the difference between mortality projected by life expectancy reports and the actual results. “The impact on investor returns can be devastating.”