Outlook for life settlement funds in 2023
January 2023 | TALKINGPOINT | FINANCE & INVESTMENT
Financier Worldwide Magazine
January 2023 Issue
FW discusses the outlook for life settlement funds in 2023 with Corwin Zass at Actuarial Risk Management.
FW: Could you provide an overview of the key developments impacting the life settlement market over the past 12 months or so?
Zass: Sitting back and reassessing the events of the last 12 months with hindsight, who really saw the double-digit losses in both the bond and equity markets? Since the life settlement market is looked at as an alternative investment, one might think that this asset class too has had similar negative returns. This is not the case. During this period of financial chaos and excessive inflation, in general the typical buyers of life settlements were not deviating too much from their prior year discount rates as part of their discounted cashflow computations that frame the price to bid. On the sale side, there were only a few stressed sellers prompting opportunistic buyers to get some attractive price points. There is a level of uncertainty as to where and when the yields of US government, and other sovereigns, will transition to. The minimal correlation of the life settlement asset class continuously attracts investors interested in some allocation for diversification and more stable returns, especially considering the financial calamity over the last 12 months. This also raises a theoretical dilemma: if risk-free rates keep rising, and market demands for life settlements continue to increase, the discount rates for these policies could drop to a potential cross-over point where the investor hurdle – target minimum – implies very little inherent risk premium over risk-free returns even though there is no reduction of the longevity risk exposure baked into every insured tied to the life settlement. The supply of life insurance policies has not waned in recent years, with continued expectation for life insurance policyowners to entertain settling of the contract. The large baby boomer cohort has not dried up, and in fact there is adequate supply for the next seven to 10 years. The bigger question is whether the economics to transact a life settlement are fair or reasonable for both stakeholders.
FW: How has the increase in interest rates changed the investor demand for life settlements?
Zass: Interest rate increases are one driver in looking at whether an investor jumps into this asset class. Due to the alternative label, the investor is looking across their investment portfolio with more trepidation than in prior years. Those with simple 60/40 equity bond investment splits are reassessing if their investment in more stable, longer tenure, returns is possible. This has caused some newer investors to explore for the first time the merits of a life settlement investment. This leaves us of the opinion that more investments are possible from a widening list of investors targeting less volatility in returns.
FW: Do you expect the National Council of Insurance Legislators (NCOIL) Resolution or other regulatory activities will change carrier encroachment into life settlement sales?
Zass: Until the summer of 2022, carriers were dealing with a decade of low interest rates causing seasoned blocks of underwritten life insurance policies to perform worse than originally priced eras ago. These compressed profits, and even losses, led carriers to look at ways to dampen the block’s poorer performance. Carriers looked at the life settlement market as another negative driver contributing to this performance. There were only a few ‘stop the bleeding’ remedies to explore – raise cost of insurance (COI) rates if possible or shrink the block of policies performing poorly. For the latter option, carriers looked to buy back the policies at a cost out of pocket less than the sum of the policy reserve and the associated capital allocated to the policy. To both shrink the block and produce some gain, the payment to the policyholder would be as low as possible. These actions drove the ire of the life settlement market and related associations, hence the adopted resolution. Beyond the legalities of the carriers’ actions, the question becomes whether the spike in interest rates is enough for carriers to believe that happier days are ahead, thus diminishing the need to continue these actions. Even if carriers did continue, these actions will not reverse the fact that carriers clearly mispriced the products from eras gone by.
“More investments are possible from a widening list of investors targeting less volatility in returns.”
FW: Do you believe there will be more standardisation in regulations or procedures that can assist the life settlements industry?
Zass: The levelling of the playing field in any industry drives consumer confidence. I suspect there can always be more rules and transparency around a policy transacting to begin with settling to standardise the life settlement closing process – the timing and documents – which is far from the efficiency of buying a house, and also the lack of consistency in the life expectancy (LE) reporting of the health assessment and determination of the corresponding average remaining months for survival. All stakeholders in the life settlement transaction would be happier with improvements in those areas.
FW: Is the industry likely to shift to use more alternatives to traditional underwriter life expectancy reports?
Zass: For the last 15 years, the life settlement market has relied on a form of medical underwriting method, originated by life insurance companies and generally unchanged for 50 years, to understand the expected remaining lifespan of an insured underpinning a life settlement. With medical reports being clearly inconsistent, open for interpretation and incomplete in the sense they offer less than a full view of all the lifestyle and genetic influences on an insured’s longevity, this additional knowledge would enhance the predictability of remaining life that is missing from the older underwriting method. For these reasons, larger investors in the asset class are employing additional techniques to dig deeper to understand the insured life expectancy that is not evident in the existing LE reports.
FW: How important is transparency and self-regulation in the life settlement funds market?
Zass: All funds should be held to higher standards, with life settlement-based funds being no exception. Self-regulation is a double-edged sword. Consider the view of the fund striving to follow some gold standard on every possible aspect, versus the fund more interested in maximising fund management fees than governing the fund with proper stewardship. Some life settlement associations have published standards that should be clearly adopted by every fund to give investors more confidence that the fund operations and management act in a quasi-fiduciary manner.
FW: Looking ahead, can we expect the supply of secondary volume seen in 2021 will continue over the next few years?
Zass: There continues to be ample supply of life insurance policies aging toward the point in which they could be settled. Whether the economics of a transaction could occur depends primarily on the insureds’ health and investor returns expectations. One life settlement market vendor indicated an increase in eligible life insured policies for the next decade. For these reasons, the ability for the market to quickly transact cannot be understated to achieve growth, as current operational methods are ill-suited to underwrite and acquire a vast increase in the number of policies settling for the first time.
As the consultancy founder and principal of the 18-year-old ARM, Corwin (Cory) Zass provides the firm with both strategic direction and technical expertise. Mr Zass, as a trained life actuary for close to 30 years, has advised on topics such as M&A, product & risk management, capital strategy and financial reporting paradigms. With more than 250 actuarial global resources, Mr Zass and his team, including his dedicated modelling team primarily in Argentina, regularly advise global clients on mortality, morbidity and other risk matters important to those participating (or investing) in the insurance space either directly or indirectly, including life and structured settlements. He can be contacted on +1 (512) 345 5200 or by email: czass@actrisk.com.
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