While some speak about the quantity of policies decreasing from its former highs, the truth is that we are seeing more policies that are eligible to purchase since the decline of 2008. In my view, the market is robust and getting stronger. The quantity of manufactured paper and other “junk” that has no value to life settlement investors has become near non-existent and the quality of the policies in the market has dramatically increased. Thus the percentage of policies that can be purchased has actually increased. This is due to the market players becoming more sophisticated and understanding what policies have the highest probability of being purchased. It is also the result of increased consumer awareness. Several states now require life insurance carriers to notify policy owners about the life settlement market, when they are about to lapse a policy and Medicaid statutes in several states have proposed to use life settlements to fund health care. These measures and concerted efforts by the Life Insurance Settlement Association and the industry is raising the awareness of policy owners of the life settlement option.
Investor demand is also quite high. RIAs continue to allocate to life settlements in an effort diversify into an alternative asset class that has little correlation to the equity markets. Institutional investors also appreciate the potential for outsized risk-adjusted returns. When one considers the normally high credit ratings of insurance carriers, the potential returns of life settlements can be attractive, particularly in today’s low-interest environment where fixed income returns are difficult to come by. While returns are a leading driver for investors, they also see greater regulation providing protections for consumers and more certainty for the assets themselves.
In short, both the supply and demand for life settlements is growing. To continue this trend, the industry needs to change the discourse. Life settlements have changed. Regulation protects sellers. Institutions have brought consistent capital and best practices all the fire to the market. States have recognized the value of life settlements through disclosure laws and Medicaid statutes. Consumers can look at life settlements as a viable option to consider.
As the life settlement message becomes clearer, more policies will come to the market. As investors continue to see the potential for outsized risk adjusted returns with low volatility, more capital will come to the market, driving up the price of policies. Higher prices for policies will encourage more sellers. This virtuous circle will drive the growth of the life settlement market.
Originally published October 2014, compliments of the Life Insurance Institute Association.