Conning Inc, has released their latest highlights and outlook of the current market for life settlements. Life Settlements Steady Grown, Growing Potential 2017 predicts that there is still growing demand and supply in the market. However, insurers’ actions, particularly the increase in COI (cost of insurance) may create some market pressure in the future.
1. Market Growth Prediction
In comparison to other alternative asset classes, the life settlements market is relatively small. Therefore, a small shift in capital commitment can alter the dynamics from a buyers’ market to a sellers’ market. The future, however, is looking bright. Demographic factors and the growing awareness of the life settlements option has seen a steady supply of policies. So, as the number of US retirees continues to increase, it has the potential to drive the growth of the life settlements market.
Conning Inc, reported that the “annual gross market potential will average at approximately $187 billion, over the period of 2017 to 2026”. They have also forecast that; the annual volume of new life settlements will average approximately $2.4 billion per year. The total face value of in-force US Life Settlements at year-end 2016, was $25.1 billion.1 (Conning, 2017, p.11)
Tertiary Life Settlements Market
The tertiary market refers to the market where investors buy and sell existing life settlements after the initial purchase of the life settlement policy is complete. In recent years, the secondary market took a back seat to the tertiary market in which portfolios of previously purchased policies are traded.
Investors are continuing to be active in the tertiary market space. However, it needs to be remembered that the tertiary market growth potential is determined by the amount of in-force policies in the secondary market. So, the significant limitation to investors is the number of secondary policies available for sale in any given year. Capital continues to be limited in the secondary market space, and current in-force policies continue to mature. Evidently, investment opportunities in the tertiary market will become sparse.
2. Cost of Insurance and its Effect on the Life Settlements Market
During the period of “2015 and 2016, 6 major life insurance companies have announced COI increases on their universal life policies.” (Conning, 2017, p.57) The increase Cost of Insurance (COI), may pose an opposing effect on market growth. Although only a small number of insurers have acted on increasing COI, time will tell how much this will influence investor confidence.
43 USA life insurance companies have life policies in the life settlements market, they represent 51%, or $4.5 Trillion, of cash value life insurance in force at year-end 2015. (Conning, 2017, p.39) Whilst, “life settlements represented less than 1% of the face value of all cash value life insurance of these 43 insurers at the end of 2016.” (Conning, 2017, p.41).
Insurance companies are concerned that the life settlements market will negatively affect insurers’ mortality rates and profitability. A “scare story” which is endorsed primarily by the insurance companies themselves. In reality, life settlements represent only a small portion of the total life insurance market.
Consequently, the cost of insurance (COI) increases have more to do with the inflexible Credit Rate clauses, in some life policies, in the current low interest rate environment.
3. Other “Life Settlement” Markets
USA life insurance policies continue to be popular. We listed 6 reasons why investors should consider life settlements. Whilst the US life settlements market is seeing an increase in popularity it’s also helping to identify gaps in other markets. Similarly, Conning Inc has identified other markets which may see future development.
German Secondary Markets for Insurance Products
A market in its infancy, compared to the US life settlements market. It’s also, focused on endowments and not life insurance. Although similar, it also presents a gap in the market for investors. An endowment policy sets up as a regular “savings plan”. At the end of a set period, (or maturity) pays out a lump sum. Typical maturities are ten, fifteen or twenty years up to a certain age limit. Some policies also payout in the case of critical illness. Therefore, the biggest distinction is that the is a KNOWN maturity date and therefore does not face longevity risks.
Long Term Care Funding
There is every growing concern for the retiring population, in the US, and the expense of long term care (LTC). According to Merrill Lynch, the USA retirement population will increase by 10,000 new retirees a day. The managing of retirement income will increasingly rely on an individual person.2 (Merrill Lynch, 2017, p.6) Therefore, the costs associated with health care is the primary financial concern for retirement. (Merrill Lynch, 2017, p.12).
“Increasing life expectancy, coupled with the ageing of the large Baby Boomer generation, will potentially give rise to growing numbers of older adults confronting chronic diseases, such as arthritis, hypertension, heart disease, stroke, diabetes, cancer, and Alzheimer’s.” (Merrill Lynch, 2017, p.15)
Most individuals, needing long term care, turn to public funds to cover their costs. However, long term care benefits paid through public funds, such as Medicaid, were one of the major sources of funding LTC in 2014. (Conning, 2017, p.79) An individual’s life insurance policy can influence the eligibility for Medicaid if the policy holds a ‘cash value’.
To qualify for Medicaid, an elder’s assets cannot exceed $2,000 for a single person or $109,560 for married couples.3 A life insurance policy that has a cash surrender value can count toward the assets. Lawmakers are attempting to introduce the disclosure of selling a life insurance policy to individuals looking to lapse their life insurance policies to qualify for Medicaid coverage.
- Conning Inc, 2017 ‘Life Settlements, Steady Growth, Growing Potential’
- Merrill Lynch Wealth Management, March 2017, Finances in Retirement: New Challenges, New Solutions A Merrill Lynch Retirement Study, conducted in partnership with Age Wave, accessed 28th July 2017, <https://mlaem.fs.ml.com/content/dam/ML/Articles/pdf/ML_Finance-Study-Report_2017.pdf >
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