Over the last five years, the life settlement marketplace has moved toward an environment where most of the population is now protected through regulation.
The 39 states implementing regulation of life insurance settlements have been guided by models proposed by the National Association of Insurance Commissioners and the National Conference of Insurance Legislators. Both of these models were updated in 2007 to address the changing environment.
The market challenges in 2007 were very much related to commission disclosure, bidding practices and stranger originated life insurance abuses. Today’s sophisticated capital sources, with a focus on asset quality, have largely resolved those issues. As the marketplace has continued to evolve, new challenges in the consumer experience must be addressed, including, perhaps, the structure of the marketplace itself.
With the increasing sophistication of capital sources, a trend has developed where funders actively approve critical aspects of the settlement transaction, including the pricing and contracting of due-diligence reviews. The higher cost of capital, longer life expectancy underwriting opinions and less demand for alternative investments, among other changes, have driven up investor return requirements, resulting in lower offers for consumers. These changes in marketplace dynamics bring into question the need for the number of intermediaries currently necessary to settle a policy.
Most sellers work through their life agent, a broker and a provider to reach the other principal in the transaction, the buyer, or funder. The role of the life agent has remained largely constant through the years. With a duty to the selling client, the life agent identifies situations where a life settlement may be appropriate for a client who, due to changing needs, is considering lapsing or surrendering a policy.
Typically, the life agent turns to a specialist settlement broker who can help assess the marketability and economic value of the policy through market knowledge combined with financial modeling. With the information provided by the broker, the life agent and client can assess options and determine the best course of action for the circumstance. If the client elects to pursue a settlement, the settlement broker will prepare the policy for market, ensuring regulatory compliance, and distribute the policy to licensed providers in a manner that protects the client’s private health and financial information.
The provider receiving the policy, however, may have seen a broad change in their role through the years. The provider remains a funder representative and the purchaser of the policy, thereby shouldering the regulatory burden. But many providers have broadened their product offering in response to the changing need of their capital sources. Most providers have policy servicing operations, fund consulting and management services, and portfolio aggregation services, or they may coinvest with the funder. Others have a narrower service offering, primarily screening policy submissions, forwarding them to the funder for pricing, communicating offers to brokers and smoothing the progress of closing contracting. It is not uncommon for both a broker and a provider to be working directly with the same funding source– the provider working with the funder in the 38 states putting regulations into effect and with the broker in the remaining unregulated states.
Perhaps the evolution of provider services demonstrates that different classes of capital sources have differing support needs, and some simply seek access to sellers. Has the industry reached another turning point, where the sophistication of certain qualified funders should allow interacting with a broker directly? Would the broker be able to keep his duty to the seller?
A quick glance at the broker dealer environment would suggest this structure is indeed possible. Such an arrangement could reduce the number of intermediaries in the sales process, possibly reducing selling costs for both the seller and the buyer. Shorter sales cycle times are a possibility, too, as the selling and buying parties’ communications move closer together. Fewer intermediaries could ease the number of regulated entities, allowing regulators to focus on transactional improvements that benefit the consumer.
The life settlement market remains a valuable option for many policy owners whose needs have changed since the issuance of a policy. The selling consumer deserves broad access to as many qualified buyers as possible, with an efficient transaction and the transparency and protections afforded by regulation. Looking to the future, with a consumer benefit focus, could a single brokerage intermediary be the next stage of the life settlement market’s evolution?!
Cyndi Poveda is vice president of the Secondary Markets Solution Center of Crump Life Insurance Services, Cleveland. She can be reached at firstname.lastname@example.org.
Fewer intermediaries could ease the number of regulated entities, allowing regulators to focus on transactional improvements that benefit the consumer.