“The Rumors of my Death Have Been Greatly Exaggerated.”
– Mark Twain
The Wall Street Journal has a further news on Thursday from the grisly world of life settlements. These are transactions where a life insurance policy owner sells their policy, usually via a broker, to “life settlement providers”. These providers may then disaggregate and re-package the policies to sell them to investor clients who take on premium risk in exchange for rights to the death benefits.
(For a detailed background into life settlements and their securitisation — “death bonds” — see FT Alphaville’s previous coverage.)
The problem: people are not dying at their forecast times, leaving investors paying more premiums than expected and receiving death benefits later than expected.
The reasons: insufficiently cadaverous actuaries and the wonders of science.
And as the WSJ reports, the SEC apparently thinks something is afoot with one company:
The Securities and Exchange Commission is investigating Life Partners Holdings Inc., a Waco, Texas, company that has arranged for investors to buy several billion dollars of life-insurance policies from their original owners, according to four people who have been contacted recently by the agency.
As part of its probe, the SEC’s enforcement division has been seeking experts to analyze the way Life Partners has estimated the life expectancies of the insured individuals, these people say. The estimates—projections of how long the people might have to live—are a crucial part of the investment equation.
The article — and its epic predecessor — details the actuarial assessments of Life Partners, a rapidly growing life settlements provider. According to its estimates, investors are being sold false promises of imminent demises:
One assumes that the numbers should be more evenly split between deaths before and after the expected date. Hence the alleged SEC probe.
The SEC is no stranger to this industry, releasing a Life Settlements Task Force report in July 2010. This followed the failure of some Wall Street investors to get returns from funds set up to invest in these markets — a victory for demographics and science reported by FT Alphaville.
Its headline recommendation is for Congress to amend the definition of securities to include life settlements. As it stands, there is no federally-registered market in the securitisation of life settlements, though state securities laws may apply.
But the SEC report does contain some fascinating historical context, and good news — at least for the portion of humanity not looking for double-digit returns from the industry:
Many point to the AIDS crisis in the 1980’s as the triggering event that resulted in the creation of a secondary market for life insurance policies.10 AIDS patients needed to pay for the high cost of medical care and had, as one of their assets, a life insurance policy. Investors were willing to pay those AIDS patients an advanced portion of their life insurance benefit in exchange for the rights to the expected death benefit of the life insurance policy.11
…
As medical advancements in the treatment of AIDS prolonged the life expectancy of AIDS patients, the viatical settlement market started looking for policy owners with other terminal illnesses and, subsequently, seniors who wanted to sell their life insurance policies.15
The glories of science and the perils of betting against retrovirals, perhaps. (NB – in these terminal cases, the technical term is viatical settlements)
Unfortunately, medical advancements in chronic conditions have allegedly led in some to a stealthy search for yield.
In most cases it is the insurance holders that look for the chance to sell their policies, in order to access cash before death. But, in a brief section of the SEC report there are details of the more dubious practice of Stranger-Originated Life Insurance (STOLI) where investors “induce” policyholders to sell when they otherwise would not. (Less death of a salesman; more salesman of death.)
Concerns over STOLI are not new and some states have taken steps to ban them under “insurable interest” laws. But the practice may becoming more difficult to identify as these policies are being packaged together with “traditional” settlement products:
Insurance industry representatives told us that insurers make efforts to stop STOLI transactions in the underwriting process. Insurers may make inquires during the underwriting process to determine whether premium financing, which is a marker of a STOLI transaction, is involved. In addition, because investors may establish trusts to purchase life insurance policies in order to conceal STOLI transactions, insurers may make inquiries regarding policies being purchased on behalf of trusts. However, the insurance industry representatives also told us that, despite their efforts, STOLI transactions can be difficult to detect, in part because investors continue to devise new ways of concealing the nature of these types of transactions. There is a concern that STOLI policies, which typically have high face amounts, therefore provide for high premium payments for insurance companies and therefore high commissions to agents. Thus, in some cases, there may not be an incentive to question them until a death claim is made.
Ghastly stuff indeed.
Related links:
Life settlements coverage – FT Alphaville
SEC Probes Company Over Life-Span Data – WSJ
Odds Skew Against Investors in Bets on Strangers’ Lives – WSJ
Late in Life, Finding a Bonanza in Life Insurance – NYT (2006)