On the State of the Life Settlement Industry
Life settlement brokers are commonly the consumer's de facto gauge of the life settlement industry. How much is my policy worth? and What is the current market like? are invariably two of the first questions policy sellers commonly ask. Life settlement brokers certainly have a finger on the pulse of the industry as they see the sometimes inequitable balance between supply and demand for life insurance policies on the secondary market.
The economic meltdown has absolutely affected the life settlement industry from both sides of the equation. Many policy owners now see themselves as overinsured with life insurance policies that are too large for their assets or estates that have shrunk in the past year or so. In addition, some seniors have realized their life insurance policies can be a source of potential liquidity while other assets have become illiquid or failing to deliver favorable yields. These conditions, in addition to a greater overall awareness of life settlements, have led to an increase in the supply of life insurance policies available to the secondary market.
However, the most noticeable change in the life settlement supply vs. demand dynamic is on the buyer side. As everyone is well aware, financial institutions have been crippled over the past year due to the capital crunch and poor loan portfolios. Financial institutions that participate in life settlements, such as investment banks, retail investment funds, hedge funds, etc., have had their buying activity affected by the same balance sheet issues. As a result many have scaled back their buying activity or temporarily suspended purchasing life insurance policies all together. For example, of the 30 plus life settlement providers my company works with, fully one-third are inactive at the moment.
As a result of the inactivity, policy sellers have seen the demand shrink for their assets, which in turn results in a lower valuation. Buyers are exquisitely sensitive to the market dynamics and have adjusted their IRR’s (Internal Rate of Return) to reflect the current environment. Meaning, of the active buyers in the marketplace they have changed their pricing models and subsequently their offers to reflect the lessened competition for policy acquisition. Consequently, life insurance policies that are being sold today are fetching less than they would have a couple of short years ago.
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