Carrier Solvency Becoming a Bigger Life Settlement Risk
Fund managers and firms looking to pool life settlement policies need to have a better understanding of the consequences if a carrier goes belly-up, according to speakers at the Life Insurance Settlement Association annual meeting.
While many life settlement managers consider carrier insolvency a theoretical risk that is only worth a cursory review, industry professionals and regulators agree that the recent financial crisis reveals that it could be a real danger going forward.
“The last thing we want to do is take over a company,” said Michael McRaith, director of the Illinois Department of Insurance. “But it’s the first thing we will do if consumers are threatened.”
Several life insurance companies suffered over the past year as assets deteriorated and investment losses mounted. While no large life companies became insolvent, a number of firms took part in the Troubled Asset Relief Program (TARP) to prop up their balance sheets.
Beyond just the possible financial loss, untested legal and regulatory questions could hamper a life settlement manager’s assets for months or even years if a large life carrier became insolvent.
For example, the structure of a life settlement fund could be a significant challenge for state-based guaranty funds looking to pay out claims on an insolvent life insurer, said Donald Henderson, a partner with the law firm of Dewey and LeBoeuf in New York.
“With a life settlement, you can have the insured original owners living in New York, the beneficiary as an investment fund in Luxembourg and have it registered with a trustees in Delaware,” Henderson said. “It’s not really clear how each state would handle those claims.”
According to the National Conference of Insurance Guaranty Funds, there are 52 funds located in the U.S. that pay outstanding claims of insolvent insurance companies.
A separate issue for the life settlement industry s is that the maximum loss — or cap — that state guaranty funds will pay on an individual policy is $300,000, while the average face value of a policy held by a life settlement firm is significantly larger.
“Guaranty funds have satisfied 90 percent of the claims that have been made, but the questions for [the life settlement industry] is ‘does that satisfy our high net worth assets,’” said Kenneth Wylie, a partner with Sidley Austin in New York. “Even if in a solvency situation, they will only pay up to the statutory limit.”
Even though many questions regarding carrier solvency and life settlements have not been answered, some examples may help the industry gauge its exposure.
In 1991 California-based Executive Life Insurance became insolvent and was taken over by regulators.In that case, Wylie explained, the existing life insurance contracts were restructured and benefits were reduced.
“Those weren’t very large policies,” he said. “And I would think that contracts this group deals with are a little larger.”
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