Alan Buerger, CEO and co-founder of Coventry, is the single most influential figure in the secondary market for life insurance. An industry veteran of more than 30 years, Buerger has used Coventry to spearhead the life settlement business, all while deflecting criticism and legal challenges to the business practice of selling unwanted life insurance in a free market environment. In this exclusive interview with National Underwriter Life & Health, Buerger discusses how he got the idea to start Coventry, where STOLI ends and life settlements begin, and what challenges the secondary market continues to face.
#1 What gave you the idea to start Coventry?
Just by way of background, I have been in the life insurance business for 40 years and have done almost everything there is to do in the life insurance business. I specialized in disability insurance. I sold life insurance payroll deduction in the middle of the night. We sold group insurance, annuities and over time, we became experts at dealing with people who were of high net worth or ultra-high net worth. Eventually we helped a half a dozen companies with the early development of their second-to-die policies. We then moved into the corporate-owned life insurance market and became one of the largest firms in the country in that business. During that time, every year or two, legislation passed that made COLI a little less attractive. We always invested a good portion of our capital back into research and development, and we worked with CNA Life Insurance Company to develop a COLI product. They had a subsidiary that was in the viatical business — individuals that were terminally ill (generally young men) — a business we weren’t in and never had an interest to be in. The viatical market was going away due to medical advancements. So, we met with the officers of that company, and they were trying to get involved with what has become life settlements. However, they really didn’t have access to the large marketing firms, but we did, because we had been involved in COLI. Within a week, we had taken them into large marketing firms and contracted them and started to develop the market.
It was very simple: we provide enormous value to consumers. The first time we bought policies was in the early 1990s, when several insurance companies were going under, and as an accommodation to clients, we bought the policies for the cash surrender value, because when a company would go into rehab, although the carriers would pay the death benefits, the policy holders could not surrender the policies. So as an accommodation, we bought life policies and annuities for the cash. We would hold them until the companies came out of rehabilitation and the asset was free and clear. At that point, it occurred to me that there was an opportunity for a business to provide value to consumers who really did not have any choice. I learned a word back then, and that word is monopsony. It is a circumstance when there is only one buyer for a seller, and in this case, it is the carriers. I realized that if someone bought a home from a developer and lived there 10 years and then wanted to sell the home, the only person they could go to was the developer, that does not put that person in very good place to negotiate. In fact, it puts them in no place to negotiate. That is the same circumstance for the secondary market. This is property. A life insurance policy is property. The courts have said that. When it is suitable, a life settlement is a very powerful option.
Personally, I am a very strong believer in life insurance, and I believe in the legacy and the impact on the community that a life insurance agent provides. I believe it is a very noble profession. I believe that people should keep their life insurance policies, but if they are not going to keep it — and a large majority are not going to keep it — then the option of a life settlement gives them more options. They can, if it is suitable, get better value than they could from the insurance company. Coventry First was started out of what I saw as a real need for consumers, and we actually took a mortgage out on our home to acquire policies and eventually developed a relationship with institutional investors.
#2 In Grisby v Russell 222, the U.S. Supreme Court stated back in 1911 that the business model for any life settlement company was constitutionally sound. So why did it take so long for the formal market to develop?
It took that long because the carriers had to create the opportunity. Policies could always be bought and sold to individuals since there was the first court case over it in 1854.
I started in the business as a career agent with Mutual of New York, and I was taught to sell, and I did sell, whole life insurance. Whole life insurance by definition, is a policy that, at the age of 95 or 100, the guaranteed cash value will equal the face amount, which is to say that every year, there is an increasing amount of cash surrender value. Our business [life settlements] is to beat cash surrender value, to pay more than what they would get if they were to surrender. With whole life, that means that they have to be very ill.
Now, there are two real factors as to why it took so long. One is it was not until 1980 that the life industry created universal life. Universal life, over time, was sold to have minimum cash value; originally, it was created to have a lot of cash value. The second reason that the market came about was because the carriers got out of the business of career agents. With a few notable exceptions, the carriers were not very good at training, and you have to train and retain agents. The retention rate for most of the big career agent carriers was unacceptable. I don’t recall the numbers, but the retention over five years was extremely low. This started in the early 1980s, and carriers that had career agents went away from being organizations that manufactured life insurance and sold it through their agents. Over time, the carriers have largely become manufacturers, and they deal with independent agents who don’t work for the carrier. Independent agents look for three things when they examine carriers. They look at the most aggressive underwriting, the highest commission and the lowest premium. What has happened is that agents are not loyal to companies because of the nature of the market. When carriers really moved away from career agents and became manufacturers, that put them in a position where they had to develop low-premium policies.
Historically, with whole life insurance, when I started in the business, all agents were judged by how persistent the business was, how much of the business stayed in force. With whole life insurance, the carriers wanted to stay in-force because they are getting more investment dollars as the cash value increases. When universal life was developed, instead of selling whole life insurance, the carriers’ product development turned to universal life, which had very little cash value.
What the secondary market is about is universal life low premiums and term insurance, not whole life. For example, out of almost 10,000 transactions Coventry has conducted, I don’t think we have bought more than 14 or 15 policies from Northwestern Mutual, because they have stayed a mutual company and focused on their historic product line with cash value. In fact, in June of 2000, the chief actuary for Northwestern Mutual, [William C.] Koenig, said that if carriers continue to give less than full value then consumers would go to the secondary market. He was prophetic, and that’s the reason why the market took so many years to develop. The carriers created the opportunity, and we moved in to take advantage of that opportunity. The inefficiencies are, very simply, very little cash in policies. The carriers put themselves in the position of policies being sold and kept in-force.
#3 Why has the life settlement industry not done a better job at differentiating itself from STOLI?
STOLI and life settlements are two different things. The carriers have been successful, to an extent, in conflating STOLI with life settlements. That is by design, and it is designed to confuse investors, regulators and legislators. If we look at the legislative arena, which is where the battle has been fought over the last decade, the carriers go in and list to legislators a parade of horribles — all the problems with life settlements.
STOLI was created by the life insurance carriers. If you go back and look at a transaction called LILACS, it is a transaction that is pure STOLI. It was promoted by UBS with the full knowledge of the carriers. It was a structure where someone would take out, let’s say, a $10 million policy and an annuity, and the annuity was designed to pay the premiums on the policy and a loan would be taken out. So, the annuity was designed to pay the premiums and pay the loan interest on the loan for the combination of the two. These were put into rated transactions and sold to investors.
In June of 2005, I testified at an informal hearing before a special NAIC committee and said that investor-initiated life insurance was a problem. The way to address that problem was through the life settlement acts. What happened is that the opposition to life settlements — the carriers — were very aggressive up though 2005, before there was any issue of STOLI. Then, I had two carriers approach me to see if we could develop some type of premium finance program that would lend on market value instead of surrender value. The carriers were interested in doing that. Why? Because they sold more insurance. One carrier actually wanted a share of the commissions from the policies sold. And initially, it was set up that way until I said, “We won’t do this.” Then we had two different carriers approach us. Interestingly enough, they have been two of the carriers that are most aggressive in opposing the secondary market.
So, for a limited period of time, the carriers successfully conflated the two, and literally, they would talk about life settlements and refer to them as STOLI. Carriers also prohibited their agents from getting involved. In terms of how we get past that, the carriers have tried to promote STOLI, by definition, as a policy that is taken out with the intent to sell. Most laws that have now been passed talk about an agreement to sell, and most court cases have come down on that side. Carriers have generally done poorly in the litigation arena; they have had a couple successes but have generally done poorly. It’s just a matter of telling the story.
At the end of the day, any transaction that benefits consumers will have legs. To differentiate between a life settlement and STOLI is something that we can do, and we can show examples. There are 10 carriers that have put out statements either in the form of press releases or in their 10-Ks that say STOLI is no longer a problem, but those same carriers work in the public arena to say STOLI is a problem.
See also: Life Settlement’s PR Savior
Where carriers have had success is in intimidating capital. I think PR is just a matter of getting the truth out, and we are doing that increasingly. STOLI impaired the growth of the market partly because people in the secondary market did not do enough to facilitate the organic growth of the market, to be out there educating agents. We have to tell the story. No more than one percent of agents have ever done a transaction, and less than 10 percent really know about them. And many don’t understand them because of the propaganda they have heard.