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  #1  
Old 03-16-2006, 03:40 PM
the-term-guy the-term-guy is offline
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Default Life Settlements Episode II - The Insurers Strike Back!

Duh. Duh-duh-duuhhh Duh-duh-duh-duh duh-duh-duh-duh. (to the tune of star wars)

Interesting post from another forum quoted below. Summary:
- insurers are now actively seeking to stop issuing policies that might be used for life settlements link
- settlement companies are actively trying to get new policies issued for no other purpose than to use them in life settlements. That's a bit draconian and likely to kill the golden goose IMO.

Quote:
LIS groups are encouraging POTENTIAL insured risks to buy policies with the specific intent of handing those policies over to the LIS investors after two years. The LIS investors underwrite all costs and make the deal very attactive for insured risks (no money out of pocket and profit if the policy is sold to the LIS after 2 years). The insured applies for life insurance, and if they are able to obtain a policy which the LIS investors like, the transaction moves forward.

The problem for the insurance company is that the LIS investors are trying to probe the life company for underwriting weaknesses. The LIS investors are NOT interested in buying policies from perfectly healthy people expected to live normal life spans. They are trying to get what they believe to be sub-standard risks underwritten by the companies with standard or favorable ratings. It is my understanding that this process could result in dozens of applications for policies before one policy is issued. (Think of the expense to life companies to underwrite policies that won't ultimately get issued.)

This creates two problems for the insurance company. First, the risk of anti-selection. Worse, someone sneaking through an application for an insured risk which has failed to disclose underwriting problems. If the policy is issued when it wouldn't otherwise have been, and once the case is on the books for 2 years, the life company is stuck and the LIS investors potentially clean up.

Second, and this applies to all LIS transactions, lapse assumptions are thrown for a loop. Companies are faced with payment of many more claims than they originally anticipated.

Companies are dealing with and can deal with the issue in two ways.

1. Refuse to issue new policies to insured risks that intend to sell them to LIS investors. In that regard Protective/Empire issued the following recent bulletin. I have temporarily put a copy of one of my servers for your information:

www.getterm.cc/IOLISOLI.pdf

I expect a number of life insurance companies to take similiar action.

2. Raise prices for new policies to take into account the lower lapse rates that will result from this activity. In other words, penalize all new policyholders for this activity.

In addition to the concerns of life companies, regulators are watching all this with considerable interest. LIS investors are attempting to head off changes to laws that might be adverse to their situation. They have formed an association and begun to form a response to attempts to regulate the market. Here is an example:

http://www.marketwire.com/mw/release...ease_id=113167

At the very least, this is an interesting topic that will get more interesting before it isn't.
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  #2  
Old 03-17-2006, 09:04 AM
fsa fsa is offline
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Default Wagers

From KRWarner (on another thread about selling policies http://www.actuarialoutpost.com/actu...ad.php?t=70973 }

"The US Supreme Court has issued a ruling on the ability to sell a policy. GRIGSBY v. RUSSELL, 222 U.S. 149 (1911). I quote a paragraph below. http://caselaw.lp.findlaw.com/script...=222&invol=149

"And cases in which a person having an [insurable] interest lends himself to one without any, as a cloak to what is, in its inception, a wager, have no similarity to those where an honest contract is sold in good faith.""

Wagering on life is already outlawed, but perhaps updated versions will also be enacted.
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Old 03-18-2006, 10:46 AM
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A person always has insurable interest in himself. Short of identifying agents who eventually sell these policies (after the fact), what can an insurance company do? How would the company know ahead of time how the policy is financed? Two years later when the policy is sold to the investor the insurance company can't do anything. The only way to deal with this is to be hard on the field force and terminate agents who sell to these arrangements.
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Old 03-18-2006, 07:09 PM
Actuary321 Actuary321 is offline
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Could insurers put in the contract that the policy cannot be sold in this type of arrangement for a minimum of X years where X is > 2? If you want a policy without this provision then you would have to purchase a different product at a higher cost.
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Old 03-18-2006, 08:09 PM
DW Simpson DW Simpson is offline
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Quote:
Originally Posted by Actuary321
Could insurers put in the contract that the policy cannot be sold in this type of arrangement for a minimum of X years where X is > 2? If you want a policy without this provision then you would have to purchase a different product at a higher cost.
And then I'll go down the street and buy from their competitor.
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Old 03-20-2006, 12:53 PM
KRWarner KRWarner is offline
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Quote:
Originally Posted by fsa
Wagering on life is already outlawed, but perhaps updated versions will also be enacted.
I do love the argument that wagering on how long people will live is bad. Dosen't that basically describe an insurance company?

Insurance Company = House

Actuary = Odds Maker

Underwriter = Handicapper

Agent = Bookie

Before you say Life Insurance companies want their insureds to live longer, I just want to say...Life Only Immediate Annuities.
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Old 03-20-2006, 05:13 PM
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Quote:
Originally Posted by Actuary321
Could insurers put in the contract that the policy cannot be sold in this type of arrangement for a minimum of X years where X is > 2? If you want a policy without this provision then you would have to purchase a different product at a higher cost.
I'm pretty sure the answer is no.
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Old 03-21-2006, 12:22 PM
A Student A Student is offline
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Quote:
Originally Posted by KRWarner
I do love the argument that wagering on how long people will live is bad. Dosen't that basically describe an insurance company?

Insurance Company = House

Actuary = Odds Maker

Underwriter = Handicapper

Agent = Bookie

Before you say Life Insurance companies want their insureds to live longer, I just want to say...Life Only Immediate Annuities.
The problem I have with this comparison is that I wouldn't say that the "house" is wagering on any specific event. If you go to a sports book and bet on the NCAA, the house doesn't care which team wins (as long as they set the odds correctly). The house is providing a service to bettors, and for that service they earn a rake. Insurance companies also provide a service (as long as there is insurable interest), and for that they earn a profit. This assumes of course that the ins co issues enough policies so that the law of large numbers holds.

Okay, I guess I'm arguing the comparison is very apt, but neither the "House" nor the insurance co is wagering on a specific outcome.
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Old 03-21-2006, 01:14 PM
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http://www.amazon.com/gp/product/048...lance&n=283155

I got this set of books when I graduated from High School. Among other things, it includes an essay by George Bernard Shaw, titled "The Vice of Gambling and the Virtue of Insurance."
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Old 03-21-2006, 03:13 PM
Actuary321 Actuary321 is offline
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Quote:
Originally Posted by D.W. Simpson Webmaster
And then I'll go down the street and buy from their competitor.
But if X is not large then many people who are not looking for underwriting loopholes so they can sell their policies will probably not care and won't go down the street. Those who are as well as some who don't want that provision will.

If the provision adversly affects marketshare then the company would need to consider that. However, if it doesn't then other companies will follow then this would be a new barrier to those buying to sell.

Yes, it would probably end up affecting some not attempting to anti-select but the company will be protected.
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