The Evolving Life Settlement Market: Insights and Opportunities (2 of 2)

Introduction

In this 2-part series, we explore the life settlements industry and its overall impact. In Part 2, we will examine key drivers for the future of the Life Settlements industry as well as how the actuary plays a key role in its success.

History of Life Settlements

Life settlements have been around since the U.S. Supreme Court decision in Grigsby v. Russell in 1911 but remained rare until the 1980s. Due to the AIDs epidemic in the 80s, the sale of a life insurance policy was primary focused on the viatical settlement (life expectancies less than 24 months). The development and widespread use of AZT, which significantly improved HIV life expectancy, effectively ended the viatical market but opened the doorway to new liquidity options for insureds through life settlements.

In the early 2000s, the option for life settlements became more prevalent; however, the industry lacked the necessary data, proper regulation, and industry standards for sustainability. The industry has since grown, now regulated in 45 states, with an ESG focus. Currently, there are several trade associations in the industry, with the Life Insurance Settlement Association (LISA) as the most recognizable in the U.S.

Key Drivers for the Life Settlements industry

· Life Expectancy Trends: Advances in medical technology and healthcare are generally leading to increased life expectancies. This has a complex effect on the life settlement market. On the one hand, it could make life settlements less attractive to some investors, as the payout timeline extends. On the other hand, it also increases the potential pool of older individuals who may consider a life settlement to fund their longer lives, especially with rising healthcare costs. The accuracy of predicting these trends will be crucial.

· Market Awareness: Awareness of life settlements as a financial option is gradually increasing among both policyholders and investors. As more people become aware of this alternative to surrendering a policy, the market is likely to expand. This increased awareness could lead to greater transparency and standardization within the industry, which would attract more institutional investors and further legitimize life settlements as an asset class. Educational initiatives and greater advisor involvement will play key roles.

· Supply Increases: The large baby boomer generation is now entering retirement, and many are facing increased healthcare expenses and evolving financial needs. This demographic trend is expected to significantly increase the supply of life insurance policies potentially available for settlement. As this generation seeks ways to optimize their assets and manage their finances, life settlements may become a more common consideration, driving market growth in the coming years.

· Demand Increases: In the current economic environment, many investors are seeking alternative investments that offer diversification and potentially higher returns compared to traditional asset classes. Life settlements, with their low correlation to the broader market, can be an attractive option. As institutional investors, such as pension funds and hedge funds, allocate more capital to alternative investments, the demand for life settlements is expected to rise, further fueling market expansion and sophistication

The Actuarial Role in Life Settlements

The inherent risk in life settlements is tied to individual mortality, making actuarial expertise indispensable to the industry's success. Actuaries play critical roles across three key practice areas.

· Investment Management: Life settlement investments offer a unique diversification opportunity, as they exhibit low correlation with broader financial markets. Consequently, investors seeking diverse asset classes often find them appealing. Fund managers with specialized asset class expertise are highly sought after, making actuaries well-suited for these roles. For instance, Dynamic Life Capital recognizes the crucial contribution of actuaries in managing life settlement funds. As Denny Mathew, ASA, MAAA, CEO of Dynamic Life Capital, notes, "Actuaries possess the necessary analytical tools to select the optimal policies for a portfolio. Data driven decisions enhance our predictive accuracy."

· Life Expectancy Provision: Accurate life expectancy (LE) estimation is the cornerstone of life settlement investments. Given the sensitivity and impact of this variable, actuaries are integral to establishing and maintaining robust mortality estimation frameworks. This involves utilizing both public and proprietary health data to construct predictive databases, thereby enhancing the statistical validity of LE assessments. Leading life expectancy providers include Longevity Services Inc., Predictive Resources, 21st Services, and Fasano Underwriting.

· Valuation Agency: Regulatory requirements for fund managers often mandate periodic third-party actuarial valuations to determine the fair market value of life settlement portfolios. These valuations, based on discounted cash flow models, must account for various policy characteristics and sensitivity, including potential LE extensions, improvement factors, and trend analyses. Investment managers rely heavily on the actuarial expertise of valuation agents, whose work is often subject to external audits. Established valuation agents in the industry include Lewis and Ellis and Actuarial Risk Management.

Conclusion

The future of the life settlement market appears poised for continued growth and evolution, shaped by increasing life expectancies, greater market awareness, the demographic shift of the baby boomer generation, and the ongoing demand for alternative investments. In this dynamic landscape, the role of the actuary is significant. Actuaries bring specialized expertise in mortality modeling, life expectancy analysis, and risk assessment, which are fundamental to accurately valuing life insurance policies and managing the inherent uncertainties of this market. A highly experienced professional, particularly an actuary, is therefore essential for navigating the complexities of an industry centered around mortality, ensuring fair transactions, and fostering sustainable growth.