Industry group the European Life Settlement Association (ELSA) published new information recently that provides insight into the status of the regulatory environment of the life settlement industry’s secondary market.
The Secondary Market Regulation ‘fact sheet’ shows which states have a regulatory regime, which don’t, which types of companies are regulated (and where), and a list of life settlement providers in each state; ELSA has created what it calls the ‘Licensed Provider Matrix’ (LPM) to illustrate this.
The LPM contains 36 licensed providers; 27 of which are licensed in more than one state, and nine of which are licensed in just one. Life settlement providers play a mandatory role in the industry’s secondary market, as they are involved in every (regulated) transaction. They are the buyer on record of the insured’s life insurance policy, purchasing this either for a life settlement asset manager, or for their own account. Both of the model acts used in the life settlement industry (either the NCOIL or NAIC) mandate the involvement of these firms. Consequently, the genesis of the endeavour was to better understand where these firms are active, and where they’re not.
“We wanted to produce a useful tool not only for the industry, but for the consumer as well,” said Chris Wells, Executive Director at ELSA. “It’s particularly important for the consumer to know that the firms that they are looking to transact with, whether that be through an intermediary, or directly, are licensed.”
Some interesting observations immediately come to mind, including that those who have a policy issued by either an Alaska or Puerto Rico-based life insurer can only sell their policy to one provider (Coventry First and Institutional Life Services, respectively). Another is that there are no states where all 36 providers are licensed.
But according to John Dallas, President of Berkshire Settlements and incoming Chair at the Life Insurance Settlement Association, the main takeaway is that the provider market is well distributed and serves the main corners of the market healthily.
“The states where most of the transactions occur in the secondary market enjoy plenty of choice for both the asset manager and the consumer. While there are some states where the number of active providers is fewer, competition is still healthy enough that market forces can deliver a fair price,” he said.
Another unsurprising observation is that, when cross-referencing the providers that completed the most deals in 2022 with the number of states they are licensed in, there’s a strong correlation.
What will be interesting to the market is how this data will evolve over time. ELSA’s LPM is the only known document mapping the provider market but had this fact sheet been published ten years ago, it would have shown many more providers. Some have gone away because of M&A activity, and some have gone away as a result of simply exiting the market. But the space has been experiencing some consolidation.
“The provider market has definitely seen some contraction in terms of numbers in the past decade,” said Wells. “But I’d still say that the data shows that this is a deep market.”
The life settlement market has seen little in the way of regulatory change for a few years. US regulator the Securities and Exchange Commission launched a task force back in 2009 to look at the market, and while the Staff did submit a report with recommendations to the Commission, ultimately no regulatory changes resulted. And most of the legal and regulatory noise in the market is generated by litigation at the policy level, whether that be related to cost of insurance increases imposed by carriers, the validity of the insurable interest in a policy, or something else. Providers have, arguably, the most settled market from a regulatory perspective that they have ever had. So, it’s unlikely that regulatory change will drive any fundamental developments in the market.
That’s not to say that nothing will change in the next few years, however. There is currently significant growth in the direct-to-consumer segment of the provider market, where media advertising is raising awareness among consumers and driving them to transact directly with a provider; whether this growth translates to a further concentration of the dominance of the firms at the top of The Life Settlement Report’s annual provider league table remains to be seen. Also, life settlement provider, Abacus Life Settlements, listed on the stock exchange earlier in 2023, the first provider to do so; their results will no doubt provide additional colour into the workings of these firms and might be a catalyst for change.
What will be most interesting to the broader life settlement industry is how this data changes over time. But for now, Dallas says that the data points to a solid market, serving not only the consumer, but the end investor well.
“Providers build relationships and source deals through the intermediated market and some drive deal flow into our space from the direct market. Regardless of the channel, there is a healthy amount of competition in all states, and certainly in those where most of the transaction activity in the secondary market takes place. End investors should be encouraged that the asset managers that they have allocated to are active in a market with many potential counterparties, which helps them from diversification, risk management, and alpha generation perspectives.”
For more ELSA fact sheets please visit the ELSA website.
