On a recent Wednesday afternoon, I found myself sitting in a tidy, angular room in a restaurant at the Museum of Modern Art in midtown Manhattan. The steam from the subway and heat from the street had conspired to dishevel me and I was in stark contrast to the waitstaff, who, with their black suits and perfectly coiffed hair could best be described as a mix between Victorian butlers and runway models. As I tried my best to feign comprehension of some of the minimalist pieces that hung from the walls, I made small talk with some fellow journalists. We were attending an event described as a “life settlements 101″ course. It was held by Coventry, a leading company in the secondary insurance market, and was something I was interested in since my understanding of the secondary market is not as deep as I would like it to be.
It was explained to me that Coventry found the restaurant at the Museum of Modern Art to be an appropriate place for the lunch because some people in the art establishment look down on modern art because it deviates from classical tenets, and that is how people in the secondary market feel the life insurance establishment views their business. Because it approaches life insurance from such a fundamentally different angle, the logic goes, the secondary market is often misunderstood.
One thing that I did know about life settlements was that they were a point of contention within the life industry and I was well aware that my “life settlements 101″ course was only going to explain one particular point of view. So, with a mix of cynicism, interest and open mindedness, I enjoyed a pleasant meal while Alan H. Buerger, co-founder and CEO of Coventry, spoke about his industry.
I decided that I would get the most out of this event if I ditched any preconceived notions I had for or against the secondary market and listen as if I had no prior information on life settlements or life insurance, but as a customer, was looking to enter the market. After all, if life insurers want to sell to my generation, so will life settlement companies, eventually.
Buerger made a strong case, indeed. He spoke of monopsony, a market form in which only one buyer faces many sellers. The seller has a poor negotiating position in such a market, and it seemed that life settlement companies were doing a service; giving people who wanted or needed to sell their life insurance policies another option besides selling them back to the carrier. It was explained to me that legally, a life insurance policy is like any other property, such as a car or a home, that can be sold for however much profit it will bring. And while this may be great for policyholders, I had to remind myself that life settlement companies are not on a crusade to restore balance to the life market so much as they are on a mission to make a profit off of how life insurance is priced and performs.
Transitioning out of my self-induced “babe in the woods” mindset, I concluded that whether you love life settlements or hate them, they are not going to vanish from the marketplace. When I first started covering the life insurance industry, every time I heard about life settlements, some comparison to STOLI would follow. Carriers have, wittingly or unwittingly, done a great job at linking the nasty little practice of stranger-originated life insurance to life settlements. However, guilt by association will not work forever, and carriers are going to have to come up with a better public relations campaign if they want to blunt the whatever competitive edge the life settlement industry has.
The facts speak for themselves. The total amount of policies sold in 1998 was $200 million dollars. By 2009, that number had jumped to $7 billion. As of 2010, 40 states regulate life settlements. For a practice that is portrayed as underhanded, only four complaints have been reported nationally to the NAIC.
There is a lot more data that I could go through, but the conclusion that must be drawn is that the secondary insurance market is growing and carriers are going to have to learn to contend with it. Life settlement companies are poised to make a push in terms of educating the general public and lawmakers, and they have the momentum to do so. If carriers truly believe that life settlements are dangerous, then they have to make a stronger argument to the public, and equating the practice with STOLI is not strong enough.
The Coventrys of the world take advantage of market inefficiencies, whether it is sloppy underwriting or the failure to adapt to changing trends in a quick enough fashion. There seems to be enough of both to keep companies that wish to “redefine insurance” growing in fertile soil. I pose this question to our readers: At what point does the primary insurance industry adapt and make an effort to correct the conditions that enable the secondary market? Or, at what point does the industry start selling life settlements itself?