Hit By Credit Crunch, US Life Settlements Drop in 2008

The credit crunch was among the factors that hurt the U.S. life settlement market in 2008, a new study by Conning Research & Consulting shows.

The firm estimates about $11.7 billion in face values on life insurance policies were settled in 2008, which is down a bit from $12.2 billion in 2007.

"The economic crisis was the major impediment to growth in the United States life settlements market in 2008, as the credit markets froze in the second half and life settlements buyers had difficulty financing new premiums," Scott Hawkins, analyst at Conning Research, said in a statement.

Conning estimated that about $6.1 billion in life insurance face values were settled in 2006, Hawkins said. That was up from $5.5 billion in 2005 (BestWire, Oct. 27, 2006).

A life settlement is an life insurance policy sold by its owner ? typically an insured or a trust ? for an amount greater than the surrender value of the policy but lower than the face amount of the policy. The buyer of the life settlement becomes the new owner and beneficiary of the policy and is responsible for making future premium payments and collecting the death benefit when the insured dies.

Senior citizens may want to sell their policy because premiums have become unaffordable; their estate planning needs have changed significantly; or, funds are needed for long-term health care, experts say (BestWire, Dec. 11, 2006).

The major underwriters of life expectancy also changed their methodologies, calling into question the accuracy and valuation of existing portfolios, Hawkins said in the statement.

Hawkins told BestWire that "put simply, in 2008 these underwriters had accumulated and analyzed more data about life expectancies than in the early years of the life settlement market. Their analysis indicated they needed to adjust how they developed life expectancies to reflect longer actual life expectancies than their prior methods estimated."

Amid the credit markets turmoil and the troubled economy, some life settlement providers may be giving life insurance policyholders less time to decide whether to sell their policies for cash, BestWire reported in 2008 (BestWire, Aug. 4, 2008).

The credit crunch, combined with institutional fund sources wanting "consistency" in pricing, is changing how providers are operating, according to William Scott Page, president and chief executive officer of the Lifeline Program, a life settlement provider. "We are seeing a clear shift in the life settlement market toward firmer prices and shorter offer times," he said at the time.

Wall Street-influenced banks, pension funds and hedge funds are demanding quicker decisions and want to speed up the settlement sales cycle, Page said (BestWire, Aug. 4, 2008).

Recently, the U.S. Securities and Exchange Commission created a life settlements task force to examine emerging issues in the market. SEC Chairman Mary Schapiro in August requested that the "multi-disciplinary" task force be created within the SEC. The issues to be examined include the role of securitizations, sales practices, privacy rights and disclosure issues (BestWire, Sept. 21. 2009).