The US is now the only remaining nationwide secondary market for consumer life insurance policies.
That’s because the German Traded Life Policy (TLP) market has gone the way of the Traded Endowment Policy (TEP) market in the UK – i.e., it is now largely defunct. Unlike the TEP market, however, it’s the macroeconomic environment, not the regulatory one, that is responsible for the demise.
Higher interest rates have essentially put paid to an entire industry that was, essentially, an interest rate arbitrage play. Policies paying interest rates of, say, 3%, were purchased during the era of central bank zero interest rate policy (ZIRP) using leverage that often cost next to nothing, with the investor pocketing the difference.
Not anymore. Recent rises in rates by the European Central Bank that began in the summer of 2022 have had the effect of eliminating the arbitrage strategy.
“It really is as straightforward as it sounds,” said Anna Bailey, a Board Member at German TLP trade association, Bundesverband Vermoegensanlagen im Zweitmarkt Lebensversicherungen (BVZL). “Interest rates are now at a point where the leverage that the investor previously used to buy these policies is now more expensive than the return on the policies – which is fixed. There’s no play here for investors, at least, at the moment.”
The development deprives Germans of an opportunity to access liquidity. Germany has, like many western countries, suffered from significantly higher inflation in the past 12-18 months when compared to the previous decade or so, meaning that its citizens have been feeling the pinch. Previously, selling a life insurance policy would have been one route for them to realise liquidity from an otherwise illiquid asset. Unlike in the UK, there’s no equity release mortgage market, meaning that regular savings and investments will need to be accessible enough should they need it. And it’s not as if Germans don’t want to sell.
“Deal flow is certainly there. Germans are facing the same challenges like everyone else, and want to access cash. It’s just that no one is buying,” said Bailey.
It also deprives investors of returns. Like US whole life insurance policies, German policies have a surrender value, but also similar to the US, it’s lower than the insured would receive if they sold on the secondary market. Investors are dumping portfolios by returning them to the carriers because doing so not only minimises losses but frees up this capital to deploy into much higher interest-yielding opportunities elsewhere, whether that be government bonds, or alternative investments, like private debt, which are much more appealing now from a yield perspective than they were in the decade or so post-GFC.
The UK TEP market would require an about-turn from the British Government in order to make a comeback, something which is unlikely. But for the German TLP market, it’s not the case that all that needs to happen is for interest rates to come down below the interest rate paid by the policies for the market to resume.
“I highly doubt the market will return – at least to the volume it once was – because the insurance carriers are developing new products that do not have the same guarantees as policies from the 1980s and 1990s. The policies being issued now are not attractive to investors,” said Bailey.
There are other markets where consumers can sell their life insurance policy. Alberta in Canada is one, but Canada doesn’t have a nationwide market, and the largest province by population, Ontario, bans the market entirely. Those investors that are seeking uncorrelated returns from life risk exposure are now down to one market – the US. Fortunately, that’s a growing one.
“The German market was only ever a few hundred million Euros, so it wasn’t nearly as large as the US life settlement market,” said Bailey. “And unlike the US market, where there are specialist asset managers in the space, few, if any, investors were focused solely on the German market, so it’s not as if there has been a significant event here. The disappointment is more that the consumer no longer has this option. It’s a real shame.”
