By Paul Bowen and Jon Mendelsohn
The life settlement industry is experiencing an adjustment in medical underwriting (life expectancies). The largest underwriting company, 21st Services, announced as of September 16, 2008 they would increase their mortality tables by 20%-30%. This is the largest adjustment in industry history, and caused many providers to reassess their current offers on cases. Even cases with completed contracts by the seller have been reassessed. Some providers are honoring their offers while others are recalculating the current value of the asset (life policy).
The increase in life tables is due to the release of the 2008 VBT Tables by the insurance industry. They were last released in 2001. Life expectancy tables adjust every few years. The last adjustment in the life settlement industry was in January 2005. The adjustment was in the single digits affecting different age demographics accordingly. For example, a male age 65 non-smoker increased more then a male age 80 non-smoker. The average age of a male in America is 78.9 years.
There are multiple life expectancy companies within the Life Settlement Industry. The three most used by providers, institutions purchasing policies, are 21st Services, AVS, and Fasano. Traditionally, 21st Services is the most aggressive. 21st Services on average was 22% less then AVS and 28% less then Fasano. This increase brings the LE companies tables closer, thus reducing LE disparity as a reason for a provider to decline a case. LE disparity is when two LE companies underwrite the same insured and one has a life expectancy of 60 months while another has a life expectancy of 98 months. Most providers decline those cases. This is not exclusive to the life settlement industry. The primary insurance industry has underwriting disparities as well. For example, one insurance carrier will rate an insured standard and another will decline.
The long term effects are good for the industry. The longevity of the settlement industry is based on the accuracy of the life expectancies, and the yield the investment companies receive. If the underwriting is aggressive and not accurate, it will greatly reduce the yield calculated by the investment firms, and they could leave the asset class. Capital sources that have stayed away in the past due to the questionable life expectancy tables are showing increased interest.
Financial professionals advising insured’s selling their life policies should manage their expectation. The increase in life expectancies could significantly reduce the value of the insured’s life policy. Ways to maximize offers is to communicate clearly and quickly with the purchasers about the necessary price-point where an offer would be accepted. The days of policyowner’s dragging their feet are over. By doing the preliminary work before formal offers are received, policyowners can prevent offers from expiring and benefit from as aggressive pricing as possible.
The life settlement industry has created $4.5 billion dollars over the cash surrender value for policy sellers, and it remains a tremendous exit strategy when suitable. It has never been more critical to have a seasoned, experienced, and technical life settlement firm to deliver results for your clients, while minimizing any potential pitfalls. If you have any questions please contact Ashar at 407.772.1818.
© 2008 Ashar Group LLC. This article may not be copied or published without written consent.
