|
|
|
Q4 - Vol. 2, No. 2, October 2005 Life Settlement News
Higher Offers: A Rising Tide Raises All Ships
We are often asked by the financial and insurance professionals with whom we work to explain the marketplace dynamics in terms of how funders price their life settlement offers. One of the primary factors that drives the pricing of offers is the involvement of life settlement brokers who wield substantial bargaining power with funders. Brokers create an auction-like environment in which multiple providers or funders present competitive offers for the same policy. Thus, the involvement of a broker is essential in determining the true market value for each policy on the secondary market.
It is important for agents and advisors to understand how pricing models affect offers. Advisors should not accept one offer from just one funder and assume it represents the policy's highest market value. A life settlement broker's primary objective is his or her obligation to the policyholder, whereas providers have an obligation to their investors to pay as little as possible for the policy.
We were recently asked to submit an offer on a case where the agent had received a $400,000 offer from a funder. We shopped the case to our network of multiple funders and returned an offer nearly three times that amount. This was an eye-opening experience for the agent who experienced first-hand the power of a life settlement broker to influence secondary market dynamics in favor of his client.
There are a variety of policy analysis factors that affect the life settlement offer, including:
1. Type of policy and the amount of the death benefit.
2. Rating of the insurance
carrier when the policy was issued. (Most funders 3. Premiums paid on the policy and remaining premiums to maturity. 4. Loans on the policy. 5. Cash value in the policy. 6. Health impairment of the insured (life expectancy). 7. Accuracy of actuarial data used to calculate life expectancy.
Insurance and financial advisors must be aware that providers vary in their pricing models for life settlements, in large part, due to their business models and operational infrastructures. Such factors include:
1. Recurring revenue stream.
(For example, continuous product flow from 2. Cost of capital (debt and equity). 3. Amount of premium reserves.
4. Regulatory issues, such as
minimum capital investment requirements for
5. Tax consequences and tax treaties
between the US and foreign countries
6. The pledging of securities
or other assets as collateral for a loan in
|
