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Conning: Life settlements face supply and demand disparity

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Life settlement sales decreased for the fourth straight year in 2011, partly due to investor nervousness about the asset class itself coupled with a preference for acquiring distressed portfolios rather than purchasing new policies.

The findings come from a study published by Conning, Life Settlements, Weak Investor Supply Despite Growing Consumer Demand.

As the name of the study suggests, there is still a healthy demand on the part of consumers to sell their unwanted or unneeded policies and, there always will be, as long as life insurers are unable to provide cash surrender amounts that reflect a certain policy’s mortality adjusted economic value. However, because life settlements are transactional to a certain extent there has to be a strong interest by all the parties involved, not just one.

Life settlements, when looked at as an asset class, were thought to be an opportune investment because of their immunity from the equity markets and their relatively competitive returns. However, investors are still dipping their toes in the water and as they chase higher yields, the growth challenge for the asset class will be attracting enough capital to purchase new policies.

Fewer new policies being settled coupled with death claims and lapses on previously settled policies has resulted in a decrease in the amount of in force life settlements for the first time since Conning has been following the market.

Conning found that in 2011 policyholders settled $1.2 billion worth of U.S. life insurance face values while investors held $35 billion of in force U.S. life settlements at year end.

Without a new influx of capital, annual volumes may remain under $2 billion for the foreseeable future, heralding in a new era that would result in smaller volumes over the short term for the asset class.

Many investors are holding life settlement portfolios that they purchased during the middle part of the last decade and they are hoping that they will begin receiving their death benefits in the near future.

Conning found that 40 percent of in force policies have been settled for seven or more years representing 13 percent of the overall $35 billion of in force face value. Based on life expectancies, Conning estimates that $6 billion of the in force policies will have death claims filed by 2018.

Two years ago Conning analyzed the future impact that the ageing in force policies will have on life insurers. They compared Universal Life insurers targeted by life settlement companies and Universal Life insurers not targeted by them. Conning projected future life settlement claims and added those claims to their respective groups in the appropriate year.

Conning’s current study took those metrics and updated the analysis using claims data filed through 2011. They found that for the UL group targeted by insurers, the impact that life settlements will have from 2012 through 2017 would increase total death claims by $4 billion. For the non-targeted UL companies, the impact would be $2billion.

Regulation, on both the policy sell side and the investor protection side is hardening, finally giving all parties involved in life settlements distinct parameters to abide by and a sense of stability. Government officials have stated that interest rates will hover at historic lows for the foreseeable future and if the equity markets remain erratic, life settlements as an asset class may become increasingly attractive hopefully leveling out investor supply with consumer demand. 


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