Compensation for Death-Bet Middlemen Fuels Risk, Conning Says
Sept. 29 (Bloomberg) — Middlemen who help investors bet on life insurance contracts lack incentive to make sure the arrangements are profitable for the buyers, according to a company that monitors the industry.
“The intermediaries have little if any skin in the game when it comes to the performance of a life settlement investment,” Conning & Co., a research and investment firm for the insurance industry, said in a report.
Fortress Investment Group LLC and American International Group Inc. are among companies that have been burned by lower- than-expected returns after acquiring books of life policies. The investors take over premium payments and count on eventually collecting the death benefit. Returns are pressured when the people covered by the policies live longer than expected, or when insurers seek to cancel policies that they issued.
The role of brokers is to find policyholders willing to turn over their contracts in exchange for one-time payments. Investors then give the middlemen a flat fee or compensation that’s tied to either the offering price or face value of a policy.
“From the investor’s perspective, this fee structure also creates a potential misalignment of interest between the intermediary and the investor,” Conning said in the report. “Another approach, though one we have seen little evidence of developing as of yet, is altering the traditional compensation model so the intermediaries have a vested interest in the eventual profitability of the life settlement.”
Darwin Bayston, chief executive officer of the Life Insurance Settlement Association, whose membership includes brokers and investment firms, said all parties already have an interest in the long-term success of the market, and that it’s up to buyers to evaluate risks before taking on contracts.
Investor Discretion
“Investors always have the discretion to buy what they want,” he said in a phone interview.
The total face value of life settlements was almost $35 billion at the end of 2013 in the so-called tertiary market involving fund managers who resell policies, Conning said. This year will probably be the third straight in which transactions increase in the market, according to a statement today from Conning.
–With assistance from Zachary Tracer and Kelly Gilblom in New York.
To contact the reporter on this story: Laura Davison in New York at ldavison4@bloomberg.net To contact the editors responsible for this story: Dan Kraut at dkraut2@bloomberg.net Dan Reichl
