The Office of Financial Research in the US published its 2024 Annual Report to Congress on 20 November, the organisation’s yearly review of its activities and efforts.
This year, the report contained something close to home for the life settlement market – a note on page 53 that began : “The most important current life insurer vulnerabilities are associated with credit and liquidity risk”.
These risks came to the fore in May for the life settlement industry when life insurance company PHL Variable Insurance Company (PHL) was entered into rehabilitation by the Connecticut Superior Court, which named Connecticut Insurance Commissioner Andrew Mais as Rehabilitator.
A significant part of the reason why PHL was entered into rehabilitation was due to its portfolio of investor-owned life insurance policies (IOLI), including those under the Phoenix Accumulation Universal Life (PAUL) policies. These products offered guaranteed benefits but became a liability due to underperforming assumptions including lapse rates, the interest rate environment, higher than expected mortality costs, and inadequate capitalisation. The cumulative impact of these challenges left PHL with a negative surplus and liabilities projected to outstrip assets by $1.46 billion by 2030.
The extent to which the PHL saga will impact the life settlement market is currently unclear, but according to Scott Hawkins, Head of Insurance Research at Conning, investors are already being somewhat more selective in terms of exposure to the life insurance companies standing behind the policies.
“Greater attention is being paid to the financial strength and performance of the companies that issued policies owned by life settlement investors,” he said in a press release covering the publication of Life Settlements: Steady On, the firm’s 2024 edition of its annual review of the life settlement market.
“Our analysis in this report found that at the end of 2023, the companies targeted by life settlements investors had a weighted average RBC (risk-based capital) slightly higher than the weighted average for the overall life insurance industry. While variations exist within the group, the higher RBC levels suggest investors have favoured policies issued by strongly capitalised insurers,” he added.
If indeed the life settlement market is adjusting its risk management approach in the short term, the bigger picture would seem to look more positive.
Conning’s report says that the secondary market is set to grow from its current $4.5bn or so in face value size to $5.5bn by 2033, and the gross market potential is set to rise from its current $200bn (approximately) to around $240bn on average. Even if life settlement asset managers were to mandate that every policy that they buy carries two serious medical conditions, then the gross market potential would still rise from $160bn today to $204bn in 2033.
But not every insured will enter into a life settlement transaction, of course. Which makes the gross number, while useful, a touch misleading. So, Conning have also calculated the net market potential, which considers the percentage of policy owners that meet investor criteria and who might consider selling their policy. That number is still a significant $170bn in 2024, rising to $180bn in 2033; even if the market were only 40% saturated, the net market potential would be approximately $95bn now, rising to $100bn in 2033.
The mathematically inclined will see that the current penetration rate is therefore approximately 2.6% of the net. This can be attributed to a few reasons, one of which is awareness – or, not enough of it – among the senior population.
Efforts are underway to address the challenges. Industry groups the Life Insurance Settlement Association (LISA) and the European Life Settlement Association (ELSA, publisher of Life Risk News) each have a range of initiatives designed to improve the general awareness level, whether that be among consumers, investors, or both.
But Conning’s report identifies the growth in the direct-to-consumer (DTC) part of the life settlement market as one that could have an impact.
“The emergence of mass media consumer advertising, especially television commercials, about life settlements is likely to have a positive impact on the gross market potential…while life settlements commercials are currently limited in terms of the number of providers advertising, this may be a case of a rising tide lifting all boats,” says the Conning report.
Simon Erritt, Senior Managing Director at Coventry Capital, agrees that the growth of the DTC market has made a substantial difference in recent years.
“I’d agree that media advertising has had a strong impact on our market and would go as far as to say that it is now the number one driver of supply into the secondary market,” he said.
Other hurdles remain. The life settlement market is heavy on administration, as brokers in the intermediated channel, and providers in the DTC market, have to source medical records, and go back and forth with life insurance companies, which can, sometimes, take weeks, and not days.
“There are some tasks in the process of completing a life settlement transaction that are out of our control,” said Rob Haynie, Managing Director at Life Settlements Inc. “In the broker market, that makes it incumbent on us to manage expectations with the client accordingly.”
These challenges are nothing new to those in the life settlement market, but as it looks towards a new year, for Erritt, there is justifiable optimism. Interest rates, while having less of an impact on the market than they do other alternative assets, are now at lower levels than in the recent past, suggesting that capital allocators could take another look at alternative assets such as life settlements in the search for yield.
And, despite the OFR’s apparent concerns, risk management processes in the life settlement space are robust, and other tailwinds should propel the market forward.
“The PHL Variable issue will impact some firms, but not all. And longevity risk analysis continues to improve,” said Erritt. “Add to that the growth in the secondary market in recent years, and I’d argue that the life settlement market has plenty to be positive about as we enter 2025.”