Recent Developments in the US Life
Settlement Market and the Impact on
Longevity Trading
Securities and Exchange Commission
Life Settlements Task Force Report and
Government Accountability Office Report
on Life Insurance Settlements
(July 2010)
• A decade of growth.
• Substantial consumer benefits.
• Proliferation of laws and regulation.
• Strong consumer protections.
• No negative recommendations.
Underlying Principle of US Life Insurance
Policies: Property Rights
“Life insurance has become in our days one of the best recognized forms
of investment and self-compelled saving. So far as reasonable safety
permits, it is desirable to give to life policies the ordinary characteristics
of property ... To deny the right to sell except to persons having such an
[insurable] interest is to diminish appreciably the value of the contract in
the owner's hands.”
-- Grigsby v. Russell, 222 U.S. 149 (1911)
Government Accountability Office Report
(July 2010)
Growth of the Life Settlement Market
YEAR
TOTAL FACE AMOUNT SOLD
1998
$200 million
2006
$5.5 billion
2008
$12.95 billion
2009
$7.01 billion
Government Accountability Office Report
(July 2010)
Life Settlements: A Tremendous Value to Consumers
In just four years (2006-2009) policyowners received $5.62 billion above
cash surrender value, an average of approximately 11 times more than
cash surrender value.
Government Accountability Office Report
(July 2010)
State of Life Settlement Regulation
• According to GAO, 38 states regulate life settlements (2/2010).
• As of TODAY, 40 states regulate life settlements, representing
86 percent of the US population.
• Major states regulate life settlements: NY, CA, IL, FL (with active
legislation in MA and ME).
Government Accountability Office Report
(July 2010)
Transparency
All states regulating life settlements require that policyowners receive
substantial consumer disclosures, including compensation to brokers,
offers and counteroffers, alternatives to settlements, tax consequences
and other disclosures.
Since 2007, every state law has required compensation disclosure.
• 34 of 40 state laws require compensation disclosure.
• Average compensation was 2.5 percent of the face amount of the policy
(and 11.9 percent of the gross offer) and decreased as a percent of
face/offer every year.
Government Accountability Office Report
(July 2010)
Accountability
• Reports of consumer complaints about life settlements “have been
limited in number.”
• Only 6 of 33 states reported any consumer complaints about life
settlements from 2007 to 2009.
Government Accountability Office Report
(July 2010)
Conclusion
“Congress may wish to consider taking steps to help ensure that
policyowners involved in life settlement transactions are provided a
consistent and minimum level of protection.”
SEC Life Settlements Task Force Staff Report
(July 2010)
Five Recommendations
1. CONSIDER recommending to Congress that it amend the definition of
security under the Federal Securities Laws to include life settlements.
2. MONITOR that legal standards of conduct are being met by brokers
and providers.
3. MONITOR the development of a life settlement securitization market.
4. ENCOURAGE Congress and state legislators to consider more
significant and consistent regulation of life expectancy underwriters.
5. Issue an INVESTOR BULLETIN regarding investments in life
settlements.
SEC Life Settlements Task Force Report
(July 2010)
Securities and Insurance Law
• 48 of 50 states regulate investments in life settlements as a “security.”
• 45 states have adopted “some form” of legislation relating to life
settlements under state insurance laws (includes both life settlements
and viatical settlements).
• SEC, FINRA and state securities regulators have successfully acted
against fraudulent investment schemes.
• Federal Securities Law Enforcement: Life Partners (1996) to Mutual
Benefits (2006).
SEC Life Settlements Task Force Report
(July 2010)
Effect of Life Settlements on Life Insurers
• Impact of life settlements on life insurance companies “likely to be small.”
• “Industry observers have predicted that life settlements will have an
insignificant impact on the insurance industry in the aggregate, given the
very small percentage of in-force policies that have been settled.”
• Only about 1 percent of life policies have been settled. (Reinsurance
News, February 2010).
• “[A] life settlement transaction generally has minimal or no impact on the
anticipated profitability of a life insurance contract.”
SEC Life Settlements Task Force Report
(July 2010)
Life Settlement Securitization
• No securitizations of life settlements registered with the
SEC to date.
• SEC aware of very few privately offered, rated life settlement
securitizations.
• Increase in securitization of life settlements is unlikely in the
near future.
SEC Life Settlements Task Force Report
(July 2010)
Amending the Definition of Security: Conflicting,
Unprecedented and Untenable
“The Task Force recommends that the Commissioner consider
recommending to Congress that it amend the definition of “security”
… to include life settlements.”
“[T]he Task Force recommends that any amendment of the definition of
“security” specifically exclude from the federal securities laws the sale of
the policy by the insured or original policyowner as we do not believe the
entire statutory and regulatory framework should apply to an individual who
decides to settle his life insurance policy” (including variable life policies).
SEC Life Settlements Task Force Report
(July 2010)
Amending the Definition of Security: Conflicting,
Unprecedented and Untenable cont.
“However, the Task Force does believe that investors seeking to invest
in life settlements and policyowners seeking to settle their life insurance
policies would benefit by having all producers, settlement brokers and
providers, including those producers and settlement brokers representing
the insured or policyowner, regulated under the federal securities laws.”
SEC Life Settlements Task Force Report
(July 2010)
Amending the Definition of Security: UNLIKELY
• SEC Report offers NO evidence of harm to sellers.
• Contradicts the GAO findings that sellers of policies are well-protected
and receive substantial consumer disclosures through state insurance
laws and that there are relatively few consumer complaints.
• Conflicts with 40 state insurance and 48 state securities laws.
SEC Life Settlements Task Force Report
(July 2010)
Amending the Definition of Security: UNLIKELY cont.
• SEC’s effort to define fixed indexed annuities as securities was outlawed
by Congress in the Frank-Dodd Wall Street Reform Act, which expressly
provides that the regulation of indexed annuities remain under state
insurance law.
• Insurance industry – carriers and producers – would likely oppose similar
encroachment by SEC.