Life Settlements

Life Settlement Market Picking Up Again?

In the October 25, 2010 issue of InvestmentNews, commentator Wm. Scott Page, President and CEO of The Lifeline Program, a life settlement provider, has an interesting “Viewpoint” piece on the return of the life settlement market. At the recent AICP conference, I spoke on Product Innovations in Life Insurance and one of my slides was used in conjunction with a discussion of the decline of life settlements that has occurred over the last two years. Mr. Page says that is over. And he offers his thoughts on why.

The key factor he points to is the decline of “manufactured” life settlements and stranger owned life insurance. He reports a return to the industry’s roots: “those owned by seniors who no longer need or who no longer can afford them.” In addition to these seniors, he points to key person policies as a significant market: policies that are owned by companies on the lives of executives who are no longer employed with them.

One of the other points he makes is that “transparency of transactions, and full disclosure of fees and commissions, must continue because they bolster our legitimacy. And provider companies must continue to present unimpeachable proof of funds when offers are made.” This seems to be essentially an argument for regulation. And it is one that I think applies to life settlements and all financial products. Without effective regulation, there are too many short term incentives for individuals and organizations to cut corners and do what is expedient but not good for producers, companies or industries in the long term.

Mr. Page discusses the decline of stranger-owned policies and life settlement industry best practices as if they developed organically, without intervention. Perhaps a cynic by nature, I think that is unlikely. I think one can look at state regulatory action and media attention on both of these fronts for the impetus for change in the settlement industry (along with other factors related to the national economic conditions). Mr. Page’s conclusion that “The life settlements industry continues to evolve at a rapid rate. Fortunately, we have seen several positive developments in recent months that show that the industry is on track and that future expectations will likely be met.” may be accurate, but I think it ignores the role of regulation on that evolution.

Investment News Point/Counterpoint on Life Settlements

In a September 12, 2010 article in Investment News, Larry J. Rybka, President and CEO of Valmark Securities Inc., and James W. Maxon, of counsel at Manning & Martin, LLP, air their differing points of view on the Life Settlements Task Force recommendation to the SEC that it urge Congress to include life settlements in the definition of securities. In [“Point/Counterpoint: Are life settlements essentially securities?”] These two debate the possible move.

Mr. Rybka states: “If the definition of a security under the securities laws were amended specifically to include life settlements under the [North American Securities Administrators Association, Inc.] model—or something closely approximating it—the definition would preserve a place for state regulation of legitimate life settlements. At the same time, it would close the door to many abusive transactions, including almost all forms of stranger-originated life insurance.”

He goes on to indicate that state settlement regulations create a “hodegepodge” of rules and regulations, inhibiting competition. He concludes: “Securities regulation would create full, fair and adequate disclosure of all material facts, and the discipline of Finra oversight would afford policy holders consistent protection in all U.S. jurisdictions. This would likely make it harder for abusers to sidestep the law. Federal securities regulation, therefore, is the next logical progression for a market that is complex, opaque and riddled with too many intermediaries.”

Mr. Maxon, in his counterpoint argument states: “the most probable consequence of such an amendment would be to increase significantly transaction costs and diminish investor interest in the asset class.” Mr. Maxon further states his conclusion that the SEC already possesses the authority to characterize life settlements as securities, based on case law he reviews briefly in the article.

Maxon looks at state regulation as well, concluding that the current regulatory scheme covers more than 90% of the U.S. population based on settlement regulation in more than 45 states. His final counterpoint: “nothing about life settlements makes the legislative blunderbuss of a revision to the definition of securities under federal law necessary or advisable.”