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Insurance
New lease on life
May 15th 2003 | NEW YORK
From The Economist print edition
The secondary market in life-insurance policies is good
for consumers
AFTER savings accounts and government bonds, life insurance
may be the most respectable of investments. It was not always
so. Until the British parliament passed the Gambling Act in
1774, which banned policyholders from insuring the lives of
people with whom they had no documented connection, many life
policies were straight bets on whether somebody—a member of
the royal family, say—would live or die.
Now, in a faint echo of those times, a secondary market in
life-insurance policies is growing rapidly in the United States.
Firms buy policies, mainly from older people, at discounts
to their face value. They pay all subsequent premiums and
collect the proceeds on the death of the insured or the maturity
of the policy. Such “life-settlement” firms bought $2 billion-worth
of policies (by face value) last year, ten times as much as
they acquired in 1998. The industry's potential—Americans
aged over 65 have life cover worth perhaps $500 billion—has
attracted such investors as General Re, a subsidiary of Warren
Buffett's Berkshire Hathaway.
Hitherto, elderly Americans with policies they do not need
or cannot afford to keep up have had little option but to
let the policies lapse or sell them back to their insurers.
Plenty seem glad to have an alternative buyer. No wonder,
when on average they can get three times as much from life-settlement
firms as they can from their original insurers.
However, the life-settlement business still has to overcome
several obstacles. One problem is that its reputation is tainted
by association with the viatical industry, which bought the
life-insurance policies of the terminally ill, usually with
AIDS, and in which fraud was common.
In addition, some life insurers see the life-settlement business
as a direct threat. Should the secondary market expand, the
proportion of policies that lapse—and on which insurers pay
no claims—would drop. Insurers would then have to pay more
out. Their profits would fall and premiums would probably
rise. So a handful of life-insurance firms are trying to hamper
the life-settlement firms' growth by prohibiting their insurance
agents from discussing them with clients and by making policies
non-transferable.
The legality of such moves is not clear. It is not certain,
says Rick Cortese of National Regulatory Services, a consulting
firm, that insurance agents have a fiduciary duty to their
clients, as brokers selling securities do—or, if they have
such a duty, whether it obliges them to discuss life settlements.
New rules being drafted by state insurance regulators would
explicitly allow agents to talk to clients about life settlements,
but would not insist on it. On the transferability question,
some states permit insurers to write policies that cannot
be sold on. Others, such as North Carolina, Florida and Louisiana,
do not.
The economic argument, however, is plain. Before the life-settlement
industry grew, life-insurance companies were the sole buyers
of unwanted policies. Now consumers have a choice, and the
chance to get more if they cash their policies in. And so
what if the life-settlement firms profit from their death?
Unlike their 18th-century forebears, the policies' buyers
have at least asked permission.
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