Blockchain technology investment continues apace. According to GlobalData, venture capital investments in the blockchain sector increased from $2.1bn in 2020 to $14.8bn in 2021. This year looks set to set a record yet again.
The life settlement market is not typically associated with cutting-edge…anything. It’s an industry that is still ‘paperwork’ intensive – buyers of life settlements need medical records from (often multiple) doctors, it’s a heavily intermediated market with insurance agents, brokers, lawyers, providers and more all being involved in the process of completing a transaction.
Increasing the expeditiousness with which transactions get completed is the first benefit that blockchain technology could unlock for this corner of the alternative credit universe.
“Blockchain technology would speed up the process of getting deals done,” said Brian Casey, Partner and Co-Chair of the Regulatory & Transactional Insurance Practice Group at law firm Locke Lord in Atlanta, GA, who has been working in the distributed ledger technology area since 2017. “There are efficiency gains and increased comfort that the documents are secure on the blockchain, assuming they are maintained correctly and are true and accurate. All of this would facilitate faster closing times.”
Indeed, a life settlement transaction in the secondary market can take up to six months to close. Much of this time is spent to-ing and fro-ing between the various parties involved, with each participant duplicating work already done by other parties. That’s not a criticism; each firm has their own processes and protocols that they have to adhere to because of the ‘trust’ issue and the lack of a single source of data. Blockchain bulls say that this duplication is solved for using distributed ledger systems.
Other benefits could be provided to the market by adopting blockchain more widely, including the building of trust between counterparties, improving the standardisation of key data to reduce redundancies, and increase the reliability of information.
On the surface, it sounds like a no-brainer. But the biggest hurdle to incorporating blockchain into the life settlement market is user adoption, aside from the need for the broader blockchain industry to become more mainstream beyond cryptocurrency uses. The industry starts and ends with the individual policyholder; they, typically through life insurance agents and life settlement brokers, bring the policy supply to market in the first place. They would have to be willing to either put their policy details and medical records on the blockchain themselves, which requires some degree of tech-savviness, or they would need to authorise an advisor to do so. And then the life insurance companies might not want to play ball.
“In a typical life settlement transaction, the provider has to get the change forms [for transfer of ownership of the policy] from the carriers. If the carriers don’t put them on the blockchain then the provider would still need to chase the carriers for this as they do now and then they would upload those forms. And that would be the case every time the policy is sold on the tertiary market unless the policy is held by a financial institution on behalf of an investor, which is commonly done through a securities intermediary,” said Casey. The financial institutions that serve as securities intermediaries in the life settlements marker should be thinking critically about their roles in a blockchain world, which cuts across many other aspects of their businesses and the custody and trading of other asset classes, he added.
The tertiary market would benefit just as much as the secondary market – possibly more. These block deals comprise many policies – tens, sometimes hundreds (and potentially, thousands). Each of these needs to have the medical records sourced and a new life expectancy analysis conducted before the buyer decides to make a bid.
“If I’m the fifth buyer of a policy, I can look at the original life settlement transaction and the three tertiary trades in one view,” said Casey. “That cuts my administration and asset diligence time significantly.”
There is also the risk of theft and manipulation. There have been a few instances of brand-name cryptocurrency exchanges being hacked in the past few years, with millions of dollars’ worth of digital assets stolen. The risk in the life settlement market is that personal data is stolen, although Casey says that the risk isn’t exclusive to blockchain.
“There is cybersecurity risk when anything is being electronically stored. Some people use the word immutable when describing a benefit of blockchain; that’s not to say that it’s risk free from unauthorised access. But if a life insurance policy or a life settlement data stored on a blockchain were to become accessed in an unauthorised manner, the block gets disrupted, and you can see that’s happened so it’s easier to detect intrusion. The whole concept of blockchain is that it’s asymmetrical encryption. You have the public key to engage in the blockchain based life settlement transaction. The buyer / provider has the credentials to the private key to unlock it,” said Casey.
The life settlement market goes to great lengths to stress that it is a force for good; when the ESG zeitgeist comes up in conversation, market participants say that there is a strong ‘S’ component, because the policy holder receives more money from a life settlement transaction than they would if they let the policy lapse – oftentimes, it’s a six-figure sum, where lapsing it gets zero. For blockchain bulls like Casey, distributed ledger technology aligns with this movement as well.
“Blockchain is all about speed to close for the policy holder and investor,” said Casey. “Simply, policy sellers get their money quicker.”
