Life Settlements Not a Rating Issue
Fitch: Life Settlements Not a Rating Issue Now for Insurers, But Could Be in Future
NEW YORK–(BUSINESS WIRE)–Sept. 13, 2007–The life settlement market exposes life
insurers and their reinsurers to a variety of risks in their core individual life segment. The primary risk is that policymakers will ultimately challenge the tax-advantaged status of life insurance if these products are viewed more as an investment security that can be bought and sold than a vehicle that provides financial protection to beneficiaries from the pre-mature death of the insured. The buying and selling of insurance policies in a secondary market could distort the very purpose of life insurance by breaking the insurable interest link between an insurer, policyholder and beneficiary. The life insurance industry greatly benefits from the tax-advantaged nature of its products. A change in the tax paradigm would have negative consequences for the industry, including the potential for adverse rating actions.
Reputational and litigation risk is also significant for market participants, given that a settlement transaction often combines complexity, substantial compensation for brokers and others arranging the transaction, product replacement, little regulation, potential fraud and the possibility of confusion on the part of elderly policyholders and their heirs. While Fitch recognizes that there are differences between what the industry refers to as ‘legitimate’ vs. ‘illegitimate’ life settlements, it believes that the emergence of the ‘illegitimate’ market is a predictable outgrowth of the ‘legitimate’ secondary market. It may also be difficult for insurers to distinguish between the two.
Direct financial risk to insurers comes primarily from actual lapse and mortality experience diverging from pricing assumptions. Life insurance products are priced with some assumption of policyholder lapse. Policies sold into the settlement market will not lapse because the investors are reliant on the death benefit to achieve their returns. Mortality on settlement policies may also differ from expectations. Many settlement originators target insureds with substandard health. Fitch believes these risks are currently manageable given the relatively small amount of life insurance in force that is estimated to be in life settlements. That view could change if the market grows rapidly.
The Special Report, ‘Fatal Attraction: Risks in the Secondary Market for Life Insurance’ is now available on Fitch’s website at www.fitchratings.com.
Fitch’s rating definitions and the terms of use of such ratings are available on the agency’s public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch’s code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the ‘Code of Conduct’ section of this site.
Source: Business Wire
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