The tertiary market for trading life insurance policies is mostly the domain of institutional investors hence one would be forgiven for assuming that everyone comes to the table with the same expertise, the same approach and the same expectations.
That would be a mistake.
Recent history is littered with case after case where relatively “household names” have entered the market with some fanfare and then exited again quite quickly and with plenty of ignominy. Tranche after tranche of life policy portfolios seem to come and go on the market sometimes trading at pennies in the dollar while other transactions more closely resemble the traditional concept of “Willing Buyer, Willing Seller at arms-length.”
Why is it so?
The tertiary life insurance market is a very interesting animal. The skill sets required to navigate it successfully are a very diverse mix. This mix of skills also needs to be in the correct balance, because too much of some and too little of others will result in sub-optimal outcomes as evidenced in the above comments about the history of the industry.
First, it requires traditional life insurance experience. Life insurance is above all else a personal relationship business. It requires good people skills and trust as you are dealing with people’s most personal information. In a tertiary life insurance transaction, post-acquisition, you require ongoing co-operation with the insured life and family for access to personal health information, and co-operation on signing forms as well. If this is ignored it will make the day to day process of managing a portfolio of policies incredibly difficult. The further you are away from the original transaction, the greater these risks become. It will also make it very easy to miss signals or red flags that an industry practitioner will recognise at acquisition thus perhaps buying substandard assets. The practitioner will also understand the documentation and quickly recognise any shortcomings as well as making premium optimisation assumptions appropriate to the new owner.
Second, you will need the discipline and rigour of a fund management background. Modelling and analysis is essential in sorting the assets on a policy by policy basis for their economic value and robustness to variable mortality assumptions and variable cash flow assumptions. This will also drive your risk appetite assumptions and strategies around managing risks like exposure parameters across the various categories. A fund management background should also help to sort out your strategy. Are you a buy and hold or a (would-be) trader? Trading these non-identical assets is notoriously difficult.
Third, Medical Underwriting. This would normally be outsourced to industry recognised players but a tertiary market player needs to understand the benefits and limits of particular Underwriters. Also there needs to be a pragmatic approach to underwriting that takes account of changing views in the industry, changing emphasis of particular issues and the changing medical environment. It is a mistake to over-emphasise the role of underwriting or the frequency that it is required, but nevertheless, a sound consistent and informed approach to underwriting is essential.
Fourth, access to a little actuarial expertise is essential as you need to be prepared to do a lot of modelling to be successful and to understand and manage risks and to have realistic expectations of your portfolio.
Fifth, Legal and regulatory due diligence. This has always been a hot issue in the life insurance sector. This should be outsourced to a competent legal firm unless you have access to exceptional in-house practitioners. Picking the right firm and paying a reasonable price for the service will of course be the challenge.
Sixth. Structuring. If you are a Non-US investor you will need a substantial commitment to housing your new portfolio in an appropriate structure that will not result in unnecessary tax leakage. Sourcing good advice is expensive particularly if you ask a top tier accounting firm for original advice.
Using the services of an existing player is a sound cost saving move in this regard as long as you can retain full control and full transparency of your assets at a reasonable price and you get good quality cogent reporting and service. It has been our experience that many service providers lack a “customer service” ethos and are notoriously opaque as to fees and costs.
As always, we wish you well with your life insurance investment opportunities and if you would like to learn more about investing in this asset, please contact us.
Disclaimer: This information is intended for qualifying investors only and was correct at the time of preparation. It has been prepared to provide general information only and should not be considered as a “securities recommendation” or an “invitation to invest” in any jurisdiction. Potential investors should consider the relevance of this information to their particular circumstances. Before proceeding investors must obtain the prospectus and take their own legal and taxation advice. If you acquire or hold one of our products we will receive fees and other benefits as disclosed in the prospectus and relevant offering documents.