An Eventful Year in the Life Settlement Industry

Abstract

The last 12 months have been very active in the life settlement industry. The life settlement market continued to expand in 2006 and, by some estimates, approximately $15 billion in face amount of policies were sold. Synthetic structures have also become available as a means to invest in life settlements without actually purchasing the physical life insurance policies. In addition to purchasing life settlements, lending into the life settlement market, and providing synthetic investment opportunities, in the past year a number of financial institutions have become part owners of life settlement providers. As further evidence of a maturing market, a number of exchanges, similar to commodities exchanges, are currently in operation, and more may be on the way. Life settlements are governed on a state-by-state basis, with 28 states having enacted laws to govern life settlements and several states having proposed legislation. The primary legislative guide for life settlement regulation has been the Viatical Settlement Model Act, promulgated by the National Asssociation of Insurance Commisioners in 2001. In May 2006, a movement to amend the Model Act began to gather momentum. In an effort to end the so-called stranger-originated life insurance (STOLI) or investor-originated life insurance business segment, the Life Insurance and Annuities (A) Committee proposed a prohibition on the sale of a life insurance policy during the first five years after the policy is issued. While the inexact nature of life expectancy determinations has been one factor that has delayed the arrival of securitization to this sector due to the difficulties encountered by the rating agencies in achieving a sufficient comfort level with life expectancy predictions, many believe that securitization presents the logical progression of the life settlement market.

TOPICS: Information providers/credit ratings, credit risk management, CMBS and commercial mortgage loans