For the first time in 24 months, the forecast for the life settlement industry is bright, particularly after surviving a perfect storm situation in 2008. The life settlement market was whipsawed two years ago when a dramatic change in life expectancy tables combined with the collapse of the credit markets to nearly cripple the industry.
The fallout was significant: Credit disappeared, hedge funds fled, offers were pulled, some companies folded and consumers ultimately suffered. However, the life settlement business has once again proven to be resilient as funding sources have returned, and the industry has another opportunity to flourish–as long as it is done the right way this time. The companies in our industry need to focus primarily on the long haul, while the goals of the capital sources need to align with the goals of the providers and the rest of the industry.
At the moment, there are a number of large players poised to help bring the industry back to prior glory. But there are challenges ahead. The industry is facing what can be best described as a crisis of confidence, which can be seen at both ends of the business.
At one end, capital sources, including hedge funds and private equity groups, remain wary. Some got burned badly from polluted portfolios containing policies with insurable-interest question marks and origination concerns. Fortunately, regulators have finally cracked-down on stranger-owned policies.
At the other end, there are skeptical agents and brokers who were let down when policy offers were pulled–sometimes inexplicably, often unprofessionally and usually with little or no notice. In between, providers had little control of the situation and were forced to make excuses that left agents and brokers scrambling for answers. It was a difficult time, and the industry as a whole has the scars to prove it.
Looking back, perhaps the industry needed the shake-up, painful as it was. The life settlement industry is unique and challenging. Too many new companies jumped into the business with little experience but a lot of attitude. They quickly secured a bunch of state licenses and started vacuuming up policies without understanding the intricacies of the business. We saw ignorance of origination and insurable interest risks; poor medical underwriting; disregard for transparency and standardization; and a complete lack of understanding of how to track the insured and manage the asset class.
As previously mentioned, the future for the industry is, indeed, bright. Moving forward, the industry needs to address the confidence issues head-on and ensure that these situations never happen again. Foremost, the goals of the providers must be better aligned with the capital. Ideally, the provider companies should have their own capital or a least direct control of the capital. Transparency also emerges again as a key factor. Full disclosure of fees and commissions adds to the industry’s legitimacy, but we need to go even further and begin to present unimpeachable proof of funds when offers are made. This is of tremendous value to brokers, agents and consumers.
In the short term, a key factor is pent-up demand. Only a select few policies have been purchased during the past year, and there are thousands of seniors who are interested in selling their policies as soon as possible.
For institutions, this means that portfolios can be aggregated to specific goals very quickly and at reasonable costs. Providers who have aligned with the new capital sources have an opportunity to grow quickly but with more control over their business.
For agents and brokers, new funding sources are emerging. This will help revive a practice area and profit center that had been dormant. As the industry embraces transparency and new best practices, such as requiring proof-of-funds letters, confidence will begin to rise and the industry will once again flourish.
For consumers, there is great promise. While offers might not be at the levels of a few years ago, the market is coming back. The option to sell an insurance policy for a profit is now available again for seniors. This in itself is an encouraging development.
Improved underwriting and more sophisticated medical exams also work in the consumer’s favor. Some providers are performing in-person paramedical examinations, just like insurance companies at policy origination, to secure the most up-to-date medical picture of policyholders. This improves underwriting and in some cases will help raise offers.
After weathering the perfect storm, the industry is poised for growth. As long as the lessons learned remain at the top of the mind, and the industry is responsible with its capital while always focusing on seniors as the primary client, then the players and the pieces are in place for the life settlement industry to once again flourish.
Wm. Scott Page is president and CEO of the Lifeline Program, Atlanta, Ga., a life settlement provider.