Lapse rates – the percentage of in-force life insurance policies in the U.S. that insured individuals voluntarily stop paying premiums on, thus voiding the policy – for individuals in 2021 fell for the second consecutive year, according to the 2022 edition of the Life Insurer’s Fact Book, the American Council of Life Insurers’ (ACLI) annual report that provides statistics and information on trends in the life insurance industry in the U.S.
The life settlement market depends entirely on insured individuals not lapsing their policies – otherwise, there would be nothing for fund managers to buy – so, a lower lapse rate means more in-force life insurance policies which in turn means, ceteris paribus, a larger pool of policies that might come to market in the future. The lapse rate was 5% in 2021, down from 5.7% in 2020 and 5.9% in 2019; it’s an encouraging statistic for the industry.
“It’s good to see the lapse rate coming down. There are many nuances to the headline number, but directionally, it’s encouraging,” said Chris Conway, Chief Development Officer at ISC Services.
The falling lapse rate in 2021 coincides with a fall in life settlement deal activity in the same year. Industry publication The Life Settlement Report, part of The Deal suggested that activity in the life settlement market fell last year, with numerous reasons cited for the pull back, one being that an effect of the Covid-19 pandemic meant that more people held onto their policies in 2021 as opposed to letting them expire.
“The past few years have probably been the most important time for a senior to keep their life insurance policy as opposed to sell it on the secondary market,” said John Welcom, Founder & CEO at Welcome Funds told Life Risk News in a life settlement broker roundtable recently.
The nuances to which Conway refers are many. One is that the life settlement market crosses over into only a small percentage of the overall life insurance industry in the U.S. The vast majority of transactions in the secondary market involve policies where the insured is over the age of 65, and even then, they focus on higher value policies in part due to the market being a heavily intermediated one, therefore transaction costs need to be considered. The ACLI data does not separate out lapse rates by cohort, so there is the possibility that lapse rates in 2021 might have increased in the area where life settlements and life insurance cross.
Another is that an argument exists that almost runs counter-intuitively to the data, which is that a falling lapse rate could have an adverse impact on the life settlement market because if more people are holding onto their policies, fewer would come to market for sale. The life settlement market promotes itself as an alternative to simply lapsing a policy so the implication here is that the message is not getting across.
Fortunately for the industry, life settlement brokers – those who conduct the auction for life insurance policies on behalf of the seller – say that 2022 has seen a significant uptick in activity.
“When the data comes out next year looking at 2022 as a whole, I’d bet heavily that we’ll see a significant increase in transactions,” Rob Haynie, Managing Director at life settlement broker, Life Settlements, Inc., recently told Life Risk News in a life settlements broker roundtable.
“In the last 3-6 months or so, we’ve seen a 20-30% monthly increase in policies for review. We project that trend to continue as we move into 2023,” added Jon Mendelsohn, CEO at life settlements broker Ashar Group.
Another encouraging data point from the ACLI’s Life Insurance Fact Book for the life settlement industry is that Americans reversed a five-year decline in the number of life insurance policies purchased. 2021 saw 10,401,000 new policies issued, the first rise since 2016 and the highest amount since 2017. Whether the drivers of this increase are simply more Americans becoming aware of their own mortality, or a general de-risking of an overall retirement plan, or something else, is unclear, but it’s all potential future deal flow for the life settlement market.
However, the current cost of living crisis could impact next year’s data. Higher than average inflation, a potential recession and consequent job losses could translate to a rise in the number of policy holders lapsing their policy in 2022 to save on the monthly premiums. That said, for American seniors, becoming something of a forced seller might support deal activity.
“Some seniors are bringing their life insurance policy to the life settlement market because of the cost-of-living situation,” said Haynie. “But I don’t think that will end up being the number one reason that drives deal flow in the coming 12-18 months. The main drivers of policies coming to market – medical bills and simply just not needing the policy anymore and therefore looking to get some cash for it – will remain.”
Regardless of the drivers of supply, one thing that the life settlement market is united about is the need for greater awareness that the life settlement option even exists. It’s a frustration as old as the market itself, and for Haynie, that’s something that the life settlement market can control.
“We can’t control interest rates, inflation, or global events,” he said. “But we can influence awareness ourselves. There are still far too many life insurance policies that lapse because the insured didn’t know the life settlement option even existed. Raising awareness is going to be the number one driver of increasing supply in our industry and it’s something that everyone I speak with is committed to supporting.”
