The life settlement market is reviving after a four-year substantive decline, and there is a place for this niche market in the long term, according to an industry expert.
One key factor driving LS market growth is the expanding elder age population, which is increasing the potential market for life settlements, said Rajiv Rebello, a principal at Colva Insurance Services in San Diego. He said that the over-65 population, a key LS market, is expected to increase from 42 million in 2012 to an estimated 70 million in 2030. “The expanding elder age population increases the LS potential,” Rebello said.
Rebello made his comments during a presentation at the annual Life Settlement and Longevity Conference sponsored annually by Fasano Associates, which is based in Washington, D.C. The statistics cited by Rebello are consistent with a new report by Conning & Co., which found “early indications” that capital is beginning to return to life settlements.
Conning found that the capital returning to the LS market continues to focus on the existing pool of policies, which is referred to as the “tertiary market.” The Conning report cited incidents of successful capital raises, potential initial public offerings (IPOs) and the purchase of existing policy portfolios. In addition, the report noted that sales of new policies in 2013 continued to increase from the previous year.
Rebello and the Conning report agreed that the prolonged low interest rate environment was “a crucial factor driving this return as investors sought alternative assets to generate comparatively higher investment returns.”
The current low interest rate environment is expected to be protracted, making LS investments attractive to such investors as family offices, Rebello said, adding that this is another positive factor in the LS market. In addition, LS investors are reducing their risk by lowering the amount they will pay to the owners of life insurance contracts, and they are finding what Rebello called “innovative investment and structuring ideas”.
“Lowering the upfront purchase price makes LS potential less volatile” in terms of profit expectations, he said.
Rebello acknowledged that LS market contains very little liquidity, or the ability of LS investors to sell their inventory to others. Another key issue for the LS industry, Rebello noted, is the long-term cost of booking life settlements.
Also important to the LS industry is gaining the trust of both potential investors and owners of life insurance policies after the debacle that followed the 2008 severe economic downturn, when investors found that the mortality projections on which they based their investments were wildly inaccurate. A critical issue here, Rebello said, is accurate mortality predictions based on the policyholder’s age and the investor’s profit expectations.
Rebello added that investors in the LS market are changing their business/marketing model to reflect the lessons learned during the severe downturn in the LS market between 2008 and 2011. He added that there is $11.2 trillion in face amount of life insurance in force, according to the American Council of Life Insurers.