Secondary Markets for Life

Transcription

The BVZL Magazine – Secondary Markets for Life Insurance Policies | September 2009 | No. 1
Titel Story
Other Topics
How safe are German life
insurance policies?
Forecast for the
Secondary Market Summit
2010 in Berlin
Secondary Market USA
Life Settlements:
“The calm before the storm?”
British Secondary Market
TEPs remain a safe investment!
New Secondary Market
Perspectives
Regulation of
closed-end funds
September 2009 | Issue 1
Contents
Introduction
Editorial
3
Greetings from the Bavarian Ministry of Finance
4
inside BVZL
After the conference is before the conference
5
7
First BVZL Journalism Prize awarded
8
Markets
German Secondary Market
Cautious optimism is appropriate
10
How safe are German life insurance policies?
12
British Secondary Market
TEPs remain a safe investment!
2
21
Secondary Market USA
“The calm before the storm?”
26
Best Practices are necessary to restore investor
confidence in the life settlement market
29
Quick facts
31
New Markets
The Exotic Markets: Secondary Markets for Life Insurance
in Australia and New Zealand
32
Spotlight
Regulation for closed-end funds: opportunity for the industry
Contents
Another fresh weissbier, please!
34
BVZL – The leading association of the Secondary Market
for Life Insurance Policies Sector
36
Imprint
36
Leveraging opportunities in the crisis
One thing is certain: The secondary
easy year for the financial sector.
markets for life insurance policies will
Many investors still fear that further
continue to offer good prospects for
losses are yet to come. As a result, they
investors. Especially in difficult times,
frequently act irrationally and advisors
they will remain an attractive invest-
can no longer reach them. Now of all
ment because of their low-risk, asset-
times, just when good advice is needed,
preserving and non-correlating
no one wants to listen.
features. In any case, it is a good idea
to take a closer look at the various
Nevertheless, we must look ahead to
markets.
see what the future holds. The Bundesverband Vermögensanlagen im Zweit-
We hope you will enjoy and profit
markt Lebensversicherungen e.V. (BVZL)
from reading the first issue of the new
and its members have made it their
BVZL magazine “lifeINSIGHT” which
goal to provide transparent, in-depth
will inform you regularly from now on
information about the various
about current trends in international
secondary markets for life insurance
secondary markets for life insurance
policies.
policies.
In the current market environment,
Thomas Laumont
it is particularly important to provide
information about the fundamental
differences and characteristics of
policies and also about the risks and
rewards. At the same time, the confidence of sales partners and potential
investors in secondary market life
insurance policies as an asset class
must be regained – namely by open,
extensive communication.
Thomas Laumont,
BVZL CEO
CEO, BVZL e. V.
Editorial
As we all know, 2009 has not been an
3
Greetings from
the Bavarian
Ministry
of Finance
Excerpt from a welcome speech held by
Georg Fahrenschon, Minister of Finance at the
Secondary Market Summit for Life Insurance
Policies in Munich on February 6, 2009
I am very pleased that the Interna-
Compared with cancelling a life in-
tional Summit for the Secondary
surance policy, selling a life insurance
Market for Life Insurance is being held
policy can make good financial sense.
this year in Munich. The capital of the
This is the very reason why it is so
state of Bavaria is an excellent venue
important to make this emergent
for an event of this kind since Munich
business sector as transparent and
is known the world over as the home
comparable as possible. The current
of major insurance companies.
financial and economic crisis shows
very clearly that the right decisions
can only be made when financial pro-
last year, has now hit us head on. The
ducts are properly understood.
financial market crisis which started in
America has taken hold of Europe and
This is why conferences like this one
by now has spared neither the eco-
are important – in order to look for
nomy nor business in general. This has
the best possible solutions in a well-
brought serious challenges for all com-
founded exchange of experience. I wish
panies. Financial service providers in
the participants in the International
particular are called upon to review
Summit for the Secondary Market for
their work in many areas, to correct un-
Life Insurance an enlightening and
desirable developments and develop
fruitful exchange of ideas and an
strategies for the future.
enjoyable stay in the capital of Bavaria.
Much confidence in financial markets
With best regards,
has been destroyed in the recent past.
Confidence is the currency on which
our economic system is based, and this
is why it is so important to reclaim this
confidence. Against this background,
the initiative of the Bundesverband
Vermögensanlagen im Zweitmarkt
Lebensversicherungen e.V. (BVZL)
(Federal Association for Investments
in the Secondary Market for Life Insurance) is a welcome sign – to set sector standards for the secondary market
for life insurance policies, to work for
more transparency and comparability,
especially in international terms.
Georg Fahrenschon
Greetings
What only gradually became apparent
4
After the conference is before
the conference
the U.S., were examined alongside
conference on “Life Insurance Policies
chances for the future and entry
in the Secondary Market” was held for
barriers in new markets like Australia,
the fifth time in Munich.
New Zealand, Italy and Japan.
At this two-day meeting, organised by
Detailed conference documentation
Bundesverband Vermögensanlagen im
can be obtained for a fee from the
Zweitmarkt für Lebensversicherungen
conference organisers Management
e.V. (BVZL ) and Management Circle
Circle and BVZL.
and chaired by CEO of BVZL Thomas
existing potential, developing new
The 2010 Secondary Market
Summit already being planned
markets”, some 120 high-calibre repre-
The 6th International Secondary
sentatives of the international industry
Market Summit will be held on 2 and 3
for secondary-market life insurance
March in Berlin. The organisers’ plans
policies discussed the prospects for
are already in full swing, so “position-
existing secondary-markets for life
ing” in the German capital will be to
insurance policies. Some of the dis-
the satisfaction of all participants.
Laumont under the motto “leveraging
cussions were themselves as lively and
controversial as the risks and rewards of
The first definitive points in the
investments in potential new markets.
programme, the speakers, and the
topics of their talks together with
This platform, which is now pan-
detailed information about booking
European, was utilised by international
procedures should be available starting
experts for internal discussion, but it
in October at www.bvzl.de and at
also produced “heated” talks with the
www.managementcircle.de, the
numerous representatives of the media
co-organiser’s homepage.
who were on hand.
There will also be numerous opporIn altogether 17 lectures, papers and
tunities next year for your company to
discussion rounds, current trends and
introduce itself to the general public
problems in the established secondary
at the 6th International Secondary
markets for life insurance policies,
Market Summit. Information will be
namely in Germany, Great Britain and
available in good time before the
conference at www.bvzl.de and
www.managementcircle.de.
inside BVZL / Events
In the spring of 2009, an international
5
Berlin, Berlin,
we’re going to Berlin!
ate!
d
e
h
t
Save
10
it 20
Summ
t
e
k
r
a
ary M
Second 3, 2010, Berlin
2–
March
In 2010, the international BVZL Secondary Market Summit will
be held for the first time in the German capital. Be sure not to
miss this summit with its exciting topics and first-class speakers!
Bavarian culture is well-known not
only here in Germany but beyond
Germany’s borders all over Europe.
Any student from abroad who has
never been to the Oktoberfest in
Munich hasn’t been anywhere! With
this in mind, on the occasion of the
International Secondary Market Summit
Meeting, arrangements were made to
give both foreign and German guests
the opportunity to enjoy a very special
treat: an original Bavarian Night!
In the Valentin Room at the rustic
“Wirtshaus in der Au” restaurant in
inside BVZL / Bavarian Night Impressions
Another fresh
weissbier, please!
Munich, conference attendees were
treated to a Bavarian buffet and one or
two freshly drafted beers at an entertaining and communicative evening
event. Along with the awarding of the
first BVZL Journalism Prize, the highlight of the event was the performance
of the Munich Showgirls with a
colorful Bavarian dance in Dirndl/
Lederhosen. A few brave “volunteers”
received – to the amusement of all
present and true to the motto “Yes,
we are Trachtler” – an exclusive Schuhplattler and Bankerl dance course.
Unanimous conclusion by all those
present: a successful evening which
everyone will gladly remember!
7
The BVZL Journalism Prize was awarded
The editors talked with prize winner
for the first time on February 10, 2009
Ludwig Riepl about current trends in
at the evening event held by the Inter-
life insurance funds and closed-end
national Summit – Secondary Market
funds.
for Life Insurance Policies. Finance edihis article “No water beneath the keel”
Mr. Riepl, how do you see the
future of life insurance funds?
which appeared in the March 2008
In the short term, the sale of policy
edition of Fonds & Co.
funds will be difficult since there are
tor Ludwig Riepl received the award for
too many negative headlines. Investors
Considering the large number of excel-
first have to regain confidence. Over the
lent articles submitted, the decision
medium term, however, life insurance
by the eight-member jury headed by
funds as an asset class will become
BVZL’s CEO Thomas Laumont was not
established. But I do not expect any new
an easy one. Nevertheless, at the end of
market players; there will only be spe-
the selection process Riepl’s article was
cialists in the market. After all, we are
clearly the winner even though it dealt
dealing here with a highly specialised
with a rather unpleasant topic for the
business which requires sound market
German secondary market industry:
expertise and excellent contacts.
liquidity problems of two German
policy funds.
We journalists also need in-depth
knowledge – there are so many aspects
to cover. In order to understand secon-
The winner of the first BVZL Journalism Prize
Ludwig Riepl at the lovely awards ceremony
dary markets for life insurance policies
and the products in these markets
with their inherent risks and rewards,
you need to bring a lot of financial
information together – for example in
Great Britain not just purchase prices,
but also the currency, so-called special
insurance funds and the prices on the
London stock exchange. BVZL also has
to compile a great deal of information.
Already today, BVZL informs all target
groups, meaning providers, investors,
and the media, too, helping them
see things in context and making the
picture clear.
inside BVZL
Grußwort
/ BVZLFahrenschon
Journalism Prize
First BVZL Journalism Prize awarded
8
Well-designed US policy funds profit
from sharply fluctuating capital markets because nearly all policy funds are
almost uncorrelated and therefore
make a portfolio more stable. In the
future in Germany, I see only institu-
in times of crisis” are not enough. We
have to specify why this is so and how
the products have to be designed to
achieve this. We have tried to do this
in the Fonds & Co. magazine and
proven that only well-managed tangible assets remain stable in a crisis.
And finally, do you have any
good advice for the issuing
houses?
Yes, inform people early on and do it
in plain language. Investors and the
media know that problems can arise
in times like these. But then you have
inside BVZL / BVZL Journalism Prize
And how will the different
submarkets develop?
to respond rapidly and intelligently
and make the best of the situation.
tional products as feasible – there will
The earlier this happens, the easier the
be some exciting products. The deve-
issuing houses affected can act instead
lopment of British life insurance funds
of simply falling behind the curve.
is difficult to assess at the moment.
Their prospects depend to a great extent on what happens in the coming
months on the stock and currency
markets.
Must the closed-end fund
industry become more transparent?
It doesn’t have to be come more
transparent but it has to market the
transparency already achieved more
aggressively; there’s no need for this
industry to hide compared with other
investment products. What is needed is
greater presence in the media and intelligent arguments instead of a defensive stance or platitudes. For example
homilies like “Tangible assets are good
9
The year 2008 was not a good one for
In 2009, what counts is regaining the
the German secondary market for life
confidence of investors in all invest-
insurance policies. Short-term interest
ment classes. Cautious optimism for
rates which had been rising since the
the asset class “German life insurance”
end of 2005 continued to climb in the
is now appropriate, especially due to
course of the year, reaching a ten-year
the fact that this class is very safe and
high of over 5 percent in November.
familiar to German private investors.
Insurers,, in contrast,, raised their
curr
cu
rren
entt su
surp
rplu
luss pa
paym
y ents only slightly
Among the reasons for this are the
by an average of som
ome
e 0.
0.11 pe
percentage
new investment opportunities from
points. Profit margins of bu
buye
yers
rs a
and
the product designers of BVZL mem-
investors thus contracted and so
some
me
bers. These designers are planning to
i sure
in
rers
rs even reported losses. On
n to
top
p
open up additional sales channels for
of thi
his,
s, thr
hree
e life insurance funds
secondary market policies and supple-
closed in su
ummer.
ment the sales market to date – consi-
Markets / German Secondary Market
Cautious optimism
is appropriate
sting mainly of closed-end funds. For
Th
he de
dem
mand forr llife
e insurance policies
example, since the end of 2008 the first
from the seconda
fr
daryy m
market collapsed,
member of the association has offered
re
esu
s ltin
ng in deccli
lini
n ng purchase prices.
for the first time direct investments
Th
he purc
rchase vol
olum
me on the secondary
in second-hand life insurance policies.
ma t, wh
market
w ich ha
had ex
expanded continual-
Private investors can select individual
Cautious optimism for the asset class
“German life insurance” is now appropriate
ly by arrou
ly
und
n 550 percent annually since
policies with suitable maturities, yields
it was
it
as e
est
sttab
st
abli
ab
liissh
hed iin
n 1999, fell from 1.4
and investment amounts from the
bill
bill
bi
llio
llio
ion eu
e ro
r s in the previous year to ap-
company’s extensive holdings, inclu-
prrox
oxim
xim
ima
attelly 50
5 0 mi
mill
l io
ll
i n euros in 2008.
ding older policies which still carry a
guaranteed interest rate of 4 percent
The gl
Th
glob
obal
b fin
in
nan
ancial
al crisis has thus left
p.a. The secondary market thus offers
itss ma
it
m rk on the Ge
Germ
r an secondary
a profitable investment alternative to
market
et for
or liffe in
insu
sura
su
r nce policies and
the first market. Investment products
prompt
ptted
ed the
e main
n players
pl
to take
for institutional investors are also
stte
ep
ps su
such
such
ch as ma
m ki
kin
ng fewer purchases,
in the pipeline. Already-structured
cu
uttttin
ng co
cossts acro
oss
ss the board and
products could not be placed in 2008
op
pti
tim
missiing
ng procce
ce
cesses.
But no sooner
due to turbulence on capital markets.
ha
ad the en
enti
enti
tire
r dimension of the crisis
For 2009, however, prospects for these
b com
be
come app
p ar
a ent when purchase
products are much brighter.
figu
fi
urre
es fo
or 20
2008 wer
ere announced than
the fi
th
first cco
onf
nfiidentt voices
vo
vo
began to
Against the background of the current
make
e thems
msel
ms
ellves he
h ard.
financial market crisis, it seems logical
10
In the past, BVZL member companies
investors will tend more to opt for
have had to send out many rejections,
classical endowment insurance poli-
since it was simply impossible to
cies as investment objects, because the
purchase as many policies as were
default risk of German life insurance
being offered by policyholders wanting
companies is particularly low, thanks
to cancel their policies.
to the extensive fallback system. From
1980 to 2007, German life insurance
This too could change again in 2009.
policies, as opposed to the market for
In the meantime there are new offers
stocks and bonds, did not see a single
for sellers of policies, a large number
loss-making year, and their returns
of which come with a purchase gua-
are considered particularly resistant
rantee attached. Prices are lower than
to fluctuation. At the same time, the
the surrender value, but in return the
net interest for German life insurance
guaranteed retention of insurance
policies averaged 1.7 percent above
protection and a repurchase option
yields on bonds outstanding.* Yields for
enable the seller to access his policy
…but in future as well, sale will remain
preferable to cancellation.
policies on the secondary market can
later and thus retain his claims to the
become much higher again since they
policy’s expiry benefit. Apparently, the
profit from the difference between
crisis has given the innovative strength
the “internal value” and the purchase
of companies in the secondary market
value of the policies and from closing
additional impetus. As the saying goes,
benefits.
“the condemned live longer.”
So how do things look for customers
interested in selling? The trend of
policyholders to consider selling their
policies remains strong. Admittedly,
profits for customers have contracted
slightly due to lower purchase prices,
but in future as well, sale will remain
preferable to cancellation. In most
cases the bottom line is a clear plus
compared with cancellation. And even
the retention of a residual lump-sum
death payment speaks for the sale.
Author: Ingo Wichelhaus, BVZL, Head of German
Department, West LB Life Markets
* Source: (Albrecht, P. “Die Kapitalanlageperformance
der Lebensversicherer 1980 bis 2007” in
Versicherungswirtschaft Heft 15/2008
that the increasingly safety-conscious
11
Do you remember statements like “over a period
of ten years, stocks always
rise”? The financial crisis has
How safe are the benefits
guaranteed by German life
insurers?
One important thing can be said
shown that such statements
beforehand: The guaranteed interest
are not always true. Worse still,
rate of German life insurance policies
many investors suffered a total
is very safe. If an insurer is no longer
loss with so-called “guarantee pro-
able to meet the guarantee obligations,
ducts”. This of course raises questions
and if no solution can be found on the
like “How safe are guarantees?” or
market, for example if the insurer or
“Who provides the guarantees?” When
his portfolio cannot be taken over by
AIG, one of the world’s largest insurers,
another insurer, a statutory guarantee
was on the brink of bankruptcy and
fund will kick in. In Germany, the gua-
could only be saved through massive
rantee fund is a statutory safety instru-
government aid, many people asked
ment, financed by contributions of its
themselves “How safe are insurance
members and subject to the German
policies in Germany?”
Financial Supervisory Authority (BaFin).
Many investors have suffered a total loss with
so-called “guarantee products.”
The question about the safety of
This is laid down in Section 124 et seq.
German life insurance policies com-
of the Insurance Supervision Act (VAG).
bines several elements. The most
The tasks of the statutory guarantee
important elements are: “How safe are
fund have been assigned to Protektor
guaranteed benefits?” and “How safe
Lebensversicherung AG. Incidentally,
(or how stable) are the surpluses?” For
Protektor was initially a voluntary asso-
the German secondary market for life
ciation of German insurers established
insurance policies, the question “How
when Mannheimer Lebensversiche-
safe are the various products investing
rung started having problems.
in German policies?” is of course also
important.
How does this statutory guarantee
fund work? When all attempts by
These three questions will be dealt
an ailing life insurance company to
with in the following three chapters of
reorganise itself have failed, BaFin will
this article.
demand that the insurance contracts
be transferred to the guarantee fund.
The contracts will then be taken over
How safe are
German life
insurance
policies?
122
EUR 500 million. In the event of re-
taken over, the insurance contracts
organisation, the guarantee fund may
will be continued unmodified. All
charge another EUR 500 million. Only
rights agreed under the life insurance
when these amounts prove to be in-
contract will remain in force and will
sufficient will BaFin reduce the obliga-
be observed to the extent provided for
tions under the contracts by up to 5 %
by law. In other words, the statutory
of the contractually guaranteed
guarantee fund will ensure that the
benefits.
In addition, the Supervisory Authority
may take steps to prevent an exceptional increase in premature terminations of contracts. In other words, the
contractually guaranteed benefits may
be reduced by up to 5 per cent. Ninety-
and managed by Protektor. Once
five percent of the guaranteed benefits
are guaranteed by the statutory guarantee fund. Premature termination
may, however, be temporarily impossible for those contracts issued by insurers whose portfolios have been transferred to the statutory guarantee fund.
How safe is the participation
in the surplus under German
life insurance policies?
guaranteed benefits under German
First and foremost, the amount of sur-
life insurance policies will continue to
plus participation is not guaranteed.
be paid (except for some minor restric-
Compared with the assumed risk, how-
tions explained below).
ever, the surplus participation is very
stable, in particular compared with
The assets of the guarantee fund are
other types of investment. Numerous
built up with the contributions of the
studies have been conducted in this
member companies. The guarantee
field (see for example “Die Kapital-
fund charges annual membership fees
anlagenperformance der deutschen
totalling some EUR100 million until
Lebensversicherer 1980–2006” (The
guarantee assets amount to approx.
Investment Performance of German
Life Insurance Companies) by Prof. Dr.
Peter Albrecht, Mannheim University,
13
for example the well-known rule that
ons work, however, is very complex.
no more than 35 per cent of funds
A lot of misunderstandings exist here,
may be invested in stocks. Section 3
and we will therefore try to explain the
AnlV restricts the investment amount
most important mechanisms below,
per debtor. This is to ensure that the
albeit in a simplified manner.
insolvency of a single debtor will not
excessively influence the insurer’s
Conservative investment is critical
investments. Finally, Sections 4 and 5
for the safety of German life insurance
AnlV contain provisions on congruency
policies and the stability of surplus
and location. Congruency means here
participation. These capital invest-
that investments must be made in the
ments are governed by numerous
currency of the insurance obligations
statutory regulations. For example,
(guaranteed benefits in euros may not
Section 54 of the German Insurance
be covered by investments denomi-
Supervision Act (VAG) urges German
nated in Japanese yen, for example),
life insurance companies to invest in
and location means that most of the
compliance with the basic principles
obligations must be covered by invest-
of safety, profitability, liquidity, mix
ments originating in the euro zone.
14
and diversification. The German Ordinance on the Investment of Restricted
The actual investment composition of
Assets of Insurance Undertakings
German insurers was and is conspi-
(AnlV) itemises these very general
cuously more conservative than would
have been possible in accordance with
the legal restrictions, as the chart in
the lefthand column showing the
100
90
80
70
60
50
40
30
20
10
0
Other
development of the composition of
Loans
investments made by German life
Registered bonds
insurers over time illustrates.
Mortgages
2000
2001
2002
2003
2004
2005
2006
Bearer bonds
Other fixed-interest securities
The income earned from such invest-
Fund shares
ments is probably the main factor con-
Stocks
tributing to the amount of surplus par-
Participations
ticipation. The “overall interest” (we de-
Real property
liberately use this term here informally)
achieved by an insurance policy each
Investment composition
development of German
insurers
year is composed of guaranteed inteprinciples in concrete terms. Section 1
rest and surpluses. It should be noted
AnlV, for example, defines the types of
here that the overall interest will on-
investment German life insurers may
ly apply to the so-called savings premi-
make. Section 2 AnlV and a circular
ums (meaning the contributions paid
letter distributed by BaFin in 2005 set
by the insured less insurance costs).
out certain quantitative restrictions,
07/2007). Just how surplus declarati-
pluses stable. Let’s look briefly at how
paid contributions will be lower.
differences between market value and
book value may arise:
As already mentioned, the amount of
the surpluses is not guaranteed. Sur-
Life insurance companies invest their
pluses may be increased or decreased
clients’ funds on the capital market.
at any time. In the worst case, there
The value of such investments may
may even be no surplus at all. It is im-
increase or decrease, depending on
portant to emphasize also that already
changes in specific capital market
allotted current surpluses may not be
parameters (notably interest and share
taken from the insured any more.
prices). But these changes in market
value will not be passed on directly to
the client. In good years, only a part of
the returns will be passed on, with the
remainder being allocated to specific
Accordingly, the return on the actually
reserve items. In bad years, part of these reserves will be released so that in
bad years the clients will be paid more
than was actually earned. The most
important reserve items are, on the
one hand, the so-called hidden reserves
which result when market values exceed book values. For example, equities
may be recorded in the balance sheet
at their purchase price even if their
current value is considerably higher.
On the other hand, there is the RfB
(provision for premium refunds). This
is a reserve item on the liabilities side
of the insurance company’s balance
The amount of surplus participation in
sheet which essentially results from
a given year is based on the so-called
the fact that surpluses are credited to
net interest yield. Put simply, net inte-
the clients only after a period of time
rest yield is the ratio of returns on in-
has elapsed. The effect of both reserve
vestments to the investments themsel-
items is that fluctuations in the capital
ves, but related to book values. The fact
market may be evened out and a com-
that book values are taken as a basis
paratively stable surplus participation
here is a critical factor in keeping sur-
may be credited to the client. The following chart (Source: Albrecht) illustrates
this. It shows that both fixed-interest
securities (shown by means of the REXP
index) and equities (shown by means
15
ticularly “good years” since there was
derably stronger fluctuations than net
a relatively big difference between in-
interest yields of German life insurers.
terest credited to policyholders by life
insurers and capital market interest
However, we must keep in mind that
rates.
the net interest yield shown in this
chart represents the market average
Since stock returns were very good,
of all insurers. Some insurers indeed
especially in the second half of the
recorded fluctuations above market
nineties, the insurers with a relatively
average.
high proportion of stocks found it fairly
Life insurance vs. REXP
Annual returns 1980–2007
Life insurance vs. DAX
Annual returns 1980–2007
20
100
LVU
RXP
LVU
DAX
80
Annual return
60
10
5
16
40
20
0
-20
0
-5
-60
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
-40
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Annual return
15
of the DAX index) are subject to consi-
Let us now take a look at how the
easy to finance the surplus they passed
smoothing mechanisms have been
on. As a result, increasing numbers of
working in the past few years. Germa-
insurers invested in stocks at the end
ny has experienced persistent low-level
of the nineties. Sadly, some of them
interest rates since the mid-nineties.
did so just shortly before the crash, so
Over many years, the insurers had
some insurers who participated in the
passed on to their clients more than
profits of the nineties only to a minor
they were able to earn with fixed-in-
degree suffered heavily from the losses
terest securities. Initially, the insurers
starting in March 2000. Since none of
financed this from fixed-interest secu-
the insurers wanted to be the first to
rities with higher interest rates which
reduce surplus participation, many of
they had bought in the eighties. For the
them kept surplus participation at a
German secondary market of life in-
comparatively high level, thus using up
surance policies, those years were par-
a large part of the above-mentioned
ticipation: First of all it should be men-
2003 did a market-wide massive
tioned that in addition to the current
reduction in surplus participation set
surplus participations we looked at
in. This is illustrated by the chart below
here there are also so-called terminal
(market average of the overall interest
surpluses which are inherently subject
over time – Source: several publicati-
to stronger fluctuations than the
ons, above all map-report).
current surpluses. In most publications
on surplus participations paid out by
The following aspect is important for
German insurers, however, they are not
the German secondary market of life
analysed or if so, only insufficiently. It
insurance policies. After interest rates
should be noted that in certain cases
fell, surplus participation decreased
(depending on the insurance tariff)
only with a certain time lag. The Ger-
terminal surpluses that have already
man secondary market of life insuran-
been allotted might be used to finance
ce policies was able to profit from this.
guaranteed benefits. And the question
But it is most likely that when interest
of whether and to what extent allotted
fluctuation reserves. Only from 2002,
17
8
7
6
5
4
3
2
7.27
7.25
7.24
7.22
1997
1998
1999 2000
7.13
6.21
4.87
4.47
4.42
4.28
4.30
4.42
4.30
1
0
Market average
of total interest
2001 2002
2003 2004 2005 2006
2007 2008 2009
rates increase in future, surplus par-
terminal surpluses will be paid out in
ticipations will likewise only increase
the event of death or cancellation must
with some time lag. Those companies
be answered differently depending on
creating capital investment products
the insurance tariff. Insurance tariffs
on the basis of second-hand life in-
according to which only a small share
surance policies today should bear this
of terminal surpluses is paid out in
in mind when making assumptions for
case of cancellation are of course more
their calculations.
attractive for the secondary market.
Following this fairly detailed explana-
In addition to the interest surpluses
tion of current interest surpluses, we
mentioned above, there are the
end this chapter by focusing on a few
so-called risk and cost surpluses. A
other important aspect of surplus par-
risk surplus occurs when the actual
regulations are relatively complex,
of occupational disability) deviate
fixing in particular different quotas for
from the assumptions on which the
different sources of surplus. Currently,
calculation is based. These surpluses
ninety percent of the return on inve-
may be positive or negative. If, for
sted capital must be credited in the
example, in an insurance policy with
form of interest credits, at least fifty
assurance character, the actual morta-
percent of cost surpluses and at least
lity figures are lower than calculated,
seventy-five percent of risk surpluses.
this will generate positive surpluses
and vice versa. The opposite is true
As an intermediary conclusion it may
for annuity insurance. If pensioner
therefore be stated that the interest
mortality is lower than estimated in
guaranteed by German life insurers is
the calculation, more benefits will be
extremely safe. Surplus participation,
payable, and this will result in negative
although not guaranteed, is relatively
risk surpluses and vice versa. Cost
stable compared with other capital
surpluses will always occur when, for
investments. Nevertheless, surplus
example, the actual expenditures of
participation is subject to fluctuation
contract management deviate from
and is therefore not suited to counter-
the management expenses allowed for
act long-term changes in interest rate
when fixing the product price. These
levels. Surplus participation usually
surpluses again may be positive or
reacts to changes in interest rate levels
negative. Surpluses may also arise due
with some time lag.
to cancellation or reinsurance.
Lately policyholders have also been
How safe are products
investing in German policies?
entitled to participate in the above-
Products investing in German life
mentioned hidden reserves when the
insurance policies apparently benefit
contract ends (regardless of whether
from the fact that such policies are
by expiration, upon death or through
safe. The question about the degree of
cancellation).
safety of a specific investment product,
however, cannot of course be answered
Finally, we would like to point out that
in general without having analysed the
so-called minimum quotas exist which
respective product beforehand. But we
are set forth in the German ordinance
would like to point out the following
relating to minimum policyholder par-
important issues:
ticipation in life insurance (Mindestzuführungsverordnung) .The respective
To start with: If a product is designed
that is associated with costs and (and
mortality figures (or the probabilities
18
percentage points above the market
surrender value) invests in a portfolio
average at that time and was far from
of insurance policies with a guaranteed
the actual worst case. Nor could sound
interest on savings premiums (i.e.
calculations for all products be found
premiums after deduction of insuran-
anywhere. For example, there was a
ce costs) of x percent, this does not
sample product whose model calcu-
necessarily mean that the investment
lation showed a positive return even
product will also carry a guaranteed
in the following stress scenario: It was
interest of x percent. This rather banal
assumed that there were neither
fact cannot be stressed enough, since
it is to be feared that small investors in
particular might mistake the interest
rate guaranteed for the insurance policy with a guaranteed interest on the
whole investment product.
In summary we can say that
the guaranteed interest of
German life insurance policies
offer a very safe investment
vehicle.
possibly at a purchase price above the
current surpluses nor terminal surpluIt is also important to note that any
ses and that the interest rate on funds
measure increasing your potential
borrowed was significantly higher
reward will automatically increase
than the guaranteed interest rate of
your risk, thus reducing safety. This
the policies. Furthermore, usual costs
is particularly the case when second-
charged by closed-end funds product
hand life insurance policies are
were imposed on the product, and it
acquired with outside capital as part
was assumed that approximately 25
of an investment product. As a rule, the
percent of all outstanding insurance
risk/reward profile of the resulting pro-
premiums represented costs. That the
duct has very little in common with the
product provider’s Excel spreadsheet
risk/reward profile of life insurances.
showed a positive return even for this
scenario can only be explained by the
In addition, as for secondary market
fact that sloppy mistakes had been
products one should make sure that
made when preparing the model cal-
the assumptions on which the projec-
culation for the product.
tions for secondary market products
are based are realistic and that the
Conclusion
calculation is made properly. Regrett-
In summary we can say that German
ably, these two prerequisites which
life insurance policies are a very safe
should be obvious are relatively seldom
investment vehicle. The guaranteed
met. Some years ago, for example, a
interest is extremely safe, and surplus
product was available on the market
participation is relatively resistant to
whose prospectus referred to a worst
fluctuation. This is ensured in particu-
case. This worst case, however, was
lar by prudent investment and certain
based on an estimated future surplus
smoothing effects through reserve
participation that was roughly 0.5
items on the asset and liabilities side
19
therefore came to the conclusion that
is of major importance for products
German life insurance policies have a
investing in second-hand life insurance
unique risk/reward ratio. This makes
policies. Special attention should be
these policies attractive also for the
paid to ensuring that a product design
secondary market and for secondary
will not only work under optimistic
market products. But a direct conse-
assumptions.
quence of this extremely high safety
level is that German life insurance
policies have a limited return potential.
Investment products increasing this
return potential (irrespective of the
measures adopted) will automatically
increase the risk, which implies that
safety will be reduced accordingly.
In view of this, a well-crafted concept
of the balance sheet. Many studies
20
Author: Dr. Jochen Russ, BVZL Advisory Board,
Institute for Financial and Actuarial Science
TEPs remain a safe
investment!
Moreover, the insurance companies
insurance policies is and will remain
must maintain a “with-profit commit-
attractive for German investors –
tee” (WPC) as a sub-committee of ma-
perhaps particularly in the current
nagement. This committee ensures
market environment. Investments in
that the insurance company adheres to
Traded Endowment Policies (TEPs) not
the regulations published in the PPFM
only promise appealing yields but in
and settles possible conflicts between
addition, with their guarantee com-
the different rate groups and their
ponents
po
e ts and
a generally
g
low volatility,
policyholders. This structure ensures
accommodate
e German investors
that all policyholders are treated
with their dessire for safety – also in
equally. In addition, the Financial Re-
times of finan
ncial crisis?
porting Council (FRC) monitors the
requirements for proper auditing and
Mr. Jäderbe
erg, please describe
the regulattory measures found
in the Britiish first and secondary marke
ets for insurance
policies.
the actuarial methods of the insurance
Th
T
he regulatorry framework in Britain
balance sheets of life insurance com-
wass es
wa
e tablished by the Financial Servi-
panies. Together, these bodies protect
cess an
and Marke
ets Act 2000. This act is
the interests of policyholders and
the
e basis of th
he Financial Services Au-
therefore the interests of TEP investors.
companies. Legal requirements and
recommendations made by the relevant authorities regulate financial reporting including annual reports and
thorritty (FSA), the
t only government re-
prod
pr
o uc
u ts (in a document called “Prin-
Equally important if not
more so for secondary-market
investors is the Financial Services Compensation Scheme.
Can you give our readers a
brief overview of the most
important points?
cipl
ci
ples
pl
ples
e a
and
n Pra
actices of Financial Ma-
The FSCS was set up under the Finan-
na
n
age
geme
me
ment”
(P
PPFM)). This document can
cial Services and Markets Act 2000
be insspe
be
p cted on
o the websites of most
(FSMA2000) which is geared to en-
in
nsura
ranc
n e com
nc
mpanies.
suring the safety of consumers’ invest-
gula
ato
tory bodyy for all banking, insurancce and cap
pital investment operation
ons in Greatt Britain. The FSA has
stip
pu
ullated tha
at life insurance companiess must pub
blish their investment
stra
ate
egy with regard to with-profit
Markets / British Secondary Market
The editors talk with Peter Jäderberg, BVZL Department
Head for Great Britain, ArensJäderberg GmbH
The British secondary market for life
ments in the event of inadequate financial management. Endowment
policies are one of the types of insurance considered long-term insurance
contracts (LTIC). These contracts are
also protected if a foreign investment
fund (for example a German fund) is
the beneficiary. The FSCS would cover
21
pose. These regulations are intended to
remaining claims at a rate of 90%,
ensure that the companies are able to
whereby “claims” refers to the entire
meet their obligations in every respect
guarantee amount – without ceilings
(type, time). If liabilities are not covered
– of the insurance contracts of one
or only insufficiently covered, larger
insurance company.
reserves must be formed to protect the
with-profit funds adequately against
An important subject –
especially in times of financial
crisis – is capital endowment
and financial stability. What is
the situation here?
such risks.
Due to the regulations and guidelines
profit committee are responsible for
of the FSA and the FRC, life insurance
seeing that solvency requirements can
companies must ensure that they have
be fulfilled at any time and that the
adequate financial reserves to cope
FSA is promptly informed if this is not
with sudden changes. Assets are divi-
the case.
Although life insurance companies
only publish balance sheets annually,
both the management and their with-
100% of the first 2.000 GBP and the
ded into different classes according to
ments and their inclusion in the sol-
Now for the secondary market
for life insurance policies: Do
German investors have cause
to worry? What happens with
investments in the secondary
market if, for example, the direct insurer goes bankrupt?
vency calculation.
In these difficult times policies have
their quality in terms of liquidity and
safety. Most of an insurance company’s
liabilities must be covered by first-rate
capital investments. Moreover, life insurance companies must observe restrictions on certain types of invest-
lost an average of 10% of their current
In stress tests, life insurance companies
maturity payment, meaning of their
must also determine how much capital
“inner” (actual) value. To protect policy-
they need under the assumed market
holders, insurance companies have
conditions at a given time in order to
even lowered the surrender value by as
be able to meet their obligations at all
much as 15%. The guaranteed maturity
times. To do this, they change the as-
payments, on the other hand, have
sessment of their assets and liabilities
risen or at least remained the same.
and the cancellation ratio of the poli-
The triple safety system for guarantees
cies and check which effects this will
is still intact. For one thing, the actuari-
have on the respective with-profits
al reserve funds for British with-profit
fund. If the reserves are not sufficient
endowment policies are classified as
to meet their commitments under
ring-fenced and thus belong to the
these “stress conditions”, additional
policyholders and not to the insurance
capital must be set aside for this pur-
company’s special funds.
22
pends on the credit standing of the
According to British law, an insolvent
respective company. At present, the
insurance company must first and
credit ratings of TEP-relevant British
foremost continue to be managed by
insurance companies are as good as
the appointed liquidator. In addition,
ever. However, if the financial crisis
all long-term insurance contracts (LTIC)
persists, it cannot be entirely excluded
are protected by the Financial Services
that British insurers would also suffer
Compensation Scheme. The FSCS covers
financial losses.
90% of the accumulated maturity pay-
The third stage of the safety and gua-
ments guaranteed in the policies. In
rantee system is the British govern-
practice the FSCS would only be called
ment. The FSA with its “fire department
on for the amount required to cover
fund” FSCS has a set of instruments
the difference between the still availa-
which guarantee the policyholder at
ble assets and the liabilities in order to
least 90% of the guaranteed maturity
meet this requirement. Policyholders
payment. In fact, the FSCS pot for TEP
are classified as prior-ranking creditors
policies has never been resorted to
and thus stand before all other credi-
because British insurance companies
tors (including even the British govern-
are subjected to stress tests daily and
ment, the employees and the liquida-
can react rapidly to weaknesses.
tors themselves). Past experience has
ny is fully responsible for the guaran-
shown that the most likely solution in
To make things clear once again: Only
the liquidation of an insurance compa-
in the event that a company is on the
ny is the transfer of policy holdings to
brink of bankruptcy or technical insol-
another insurer. All remaining assets
vency would the FSA intervene and
are also transferred.
demand immediate remedial measures. This could be the transfer or the
injection of additional capital or the
merger of the company with a stronger
partner. And only when these measures fail would the company be declared
insolvent and become subject to the
regulations governing insolvency. In
actual practice, solutions have always
been found so far to prevent the dissolution of a major British insurance
company.
tee. The value of this obligation de-
What happens to the policies
if an insurance company
becomes insolvent?
Apart from this, the insurance compa-
23
retain some degree of flexibility in
their capital investment policy for the
with-profit funds.
Yes. TEPs are still a safe investment
You mentioned the subject of
guarantees. What do TEP
guarantees actually mean?
with good prospects for returns, and
Two guarantee components are typical
this applies regardless of the amount
for TEPs: the basic sum assured or the
of the current bonus rates. And yes,
sum assured and the sum of the bonus
the bonus rates are low, namely for the
payments accrued up to a given date
following reasons: The most important
(known as reversionary bonuses or
reason is that the long-term assumed
attaching bonuses/bonuses attaching).
interest rate level is far lower today
than in the 1980s and 1990s when the
The insurance companies aim to effect
bonus payments at that time were
ongoing – annual - bonus payments
decided on.
over the entire life of the policy.
Moreover, legal requirements (i.e. insu-
a result, payment of current bonuses
Let’s talk about bonuses. How
do insurance companies determine the bonuses? What is the
relationship between ongoing
bonus payments and the trend
in the value of the actuarial
reserve funds?
has a greater effect on reserves and
As for bonus payments, the aim is pay-
thus on performance than was the
ment of an amount commensurate
case in the past.
with the average performance by the
rance companies must form reserves,
etc.) have changed. They are far more
conservative than in the past and demand more cautious action to ensure
the promised guarantee payments. As
time the policy matures. With refeWhat’s more, most with-profit rates
rence to an insurance contract, the
are no longer offered in the meantime
insurance company builds up a
or are no longer actively sold and thus
guaranteed achievable payment at
generate far smaller amounts for new
maturity. When the policy matures, a
investments. This means that with-
terminal surplus can also be paid
profit funds must be managed much
which depends on the amount of the
more cautiously than before. Since
current surplus and the reserves which
lower ongoing bonuses are allocated to
the insurance company has formed
the contracts, the insurance companies
and which is also subject to smoothing.
According to those who know
the market, TEPs are still a safe
investment with good prospects for returns. Is this true,
even though the current bonus
rates are currently so low?
24
More important for the reversionary
payment at maturity and the terminal
bonuses, however, is the long-term
bonus is sometimes called the com-
view of these returns. The bonus rates
pany’s “bonus philosophy.” Some (con-
refer to the sum assured, whereas the
servative) insurance companies build
annual return of a with-profits fund
up a large guarantee block during the
refers to the respective asset shares.
life of the policy and distribute only a
Initially the sum assured will be a mul-
relatively low terminal bonus. Other
tiple of the asset share (from paid-in
(less risk-averse) companies pay smal-
premiums and generated in the form
ler bonuses during the life of the policy
of surpluses).
in order to generate a higher terminal
bonus with the free reserves which will
– hopefully - then be higher. Reversionary bonuses are influenced up to a
certain point by the current returns of
Thank you for this discussion.
The combination of the guaranteed
the with-profits funds.
25
many people are reluctant to resort to
If we disregard the poor global
alternative for many people. Selling a
economy where the cyc
cyclical impacts
policy on the secondary market for life
due to the financial crissis are already
insurance policies in the U.S. lowers
reflected today in the re
eal economy,
monthly expenses and provides liquidi-
the secondary market for
f life insurance
ty while people are still alive.
these unattractive options. In contrast,
the sale of a life insurance policy
just now is a relevant and appealing
policies in the U.S. is stilll developing
“The calm before
the storm?”
positively for investors.
And the second trend?
This is the limited demand. Due to the
Can you be more sp
pecific about
the positive develo
opment?
volatile markets – and some have been
We are observing two trends in par-
have put above-average amounts of
ticular. First, the growin
ng number of
equity in short-term, risk-free alterna-
policies for sale on the market.
m
The
tives. In addition, many investors have
baby boomer generatio
on which is reti-
been unable to borrow more capital.
ring now and will retire
e in the next few
Altogether these effects have meant
years has been hard hitt by plunging
that fewer investors have invested
stock markets. The returns they were
smaller amounts in the secondary
counting on for retirem
ment are just
market in the U.S.
very volatile – large-scale investors
p ain gone. This is particularly tragic in
pl
pensions are very smalll. In order to
pe
Where has this development
led?
re
eta
t in their accustomed
d standard
Due to the growth of offers on the one
off lliv
i ing or close the gap
p which has
hand and the reduced demand on the
aris
isen, many Americans must continue
other, policies have been purchased
work
rking or return to wo
ork. Moreover,
for a price which suggests a higher
the te
tense situation on the
t job market
expected return on average. This in
is forrci
cing other private individuals to
turn arouses growing interest, predo-
r duce
re
ce their monthly ex
xpenses or part
minately from institutional investors.
with ass
s ets in favour off more short-
However, it is not yet clear when they
term liq
te
iquidity. In the pa
ast, the options
will invest bigger amounts again.
the U.S. since governme
th
ent retirement
were sel
we
elli
l ng their house
e or taking up a
re
eve
v rse
e mo
m rtgage.
This would be prettty difficult
in the current real estate
crisis ….
Can you give us an example of
this growing interest?
This interest was obvious at the Dealflow Conference in Las Vegas in Sep-
Ex
xa
acctl
tly. Con
onsidering the
e historically
tember 2008 which was well attended,
lo
ow p
prric
i ess ffor property at the moment,
with over 1,000 participants.
Markets / Secondary Market USA
The editors talk with Franz-Philippe Przybyl, BVZL,
Head of the US Department
Mr. Przybyl, how do you see
the secondary market for life
insurance policies in the U.S.
at the moment?
26
market and led to downgrading the
Markets Association (ILMA) which was
ratings of several insurance companies.
founded in 2007 by several institu-
Altogether, however, we can say that
tionals has been actively pursuing its
the life insurance industry is basically
work. The great interest in this asset
stable and financially stronger than
class was also reinforced by the 180
other insurance sectors.
participants from the institutional side
at the first ILMA Conference held in
May 2009 in London.
Public attention was focussed
mainly on AIG …
In September 2008 AIG suffered from a
Some of the American insurance companies have been drawn
into the maelstrom of the
financial crisis. What exactly
caused this?
liquidity squeeze, among other things,
We have to differentiate in judging the
red credit line of USD 85 billion. This
effects of the global recession on the
and subsequent measures have so far
insurance industry in the U.S. While
managed to save the company from
some holding companies, due to their
bankruptcy. AIG found itself short of
activities especially in mortgage and
liquidity primarily because of losses in
reinsurance business, had to struggle
mortgage and bond insurance opera-
with considerable problems, the life
tions.
after the rating of the parent company
was downgraded from AA- to A-. To
ease the situation, the U.S. government
offered support in the form of a secu-
insurance segments and companies
were for the most part stable and
In contrast, AIG’s life insurance sub-
remained in good financial shape.
sidiary is not directly influenced by
In particular measures which have a
the financial fate of the unregulated
strong influence on the confidence of
parent company. It still has reserves
policyholders, such as policy payments
and ultimately is also backed by the
when claims are submitted, are the
Deposit Protection Fund of the Associa-
main ones taken and are still backed,
tion of German Banks of the respective
notably by the Deposit Protection Fund
states.
of the Association of German Banks
their stock and bond portfolios which
So is there a difference in the
performance of an insurance
holding and its life insurance
subsidiary?
seriously reduced their reserves. The
Yes, a holding comprises all business
repeated short-term refinancings
segments. This covers all insurance
which insurance companies require
activities, including unregulated activi-
were increasingly impossible to obtain
ties. Thus a holding can perform diffe-
because of insufficient liquidity in the
rently than its life insurance subsidiary.
for the respective states. The holding
companies of many insurance firms
suffered heavy losses in the value of
In addition, the Institutional Life
27
benefits for policies which are suited
At the end of 2008, new life expec-
to a current market penetration of just
tancy tables were published based on
under 11 percent and shows that there
updated actuarial tables issued by the
is still enormous growth potential
US Actuarial Association. In addition,
for the U.S. secondary market for life
today the symptoms of policyholders
insurance policies. The placement
are studied in a more sophisticated
volume of all German closed-end funds
manner so more precise life expec-
on the U.S. secondary market totalled
tancy reports can be made. One of the
over 302 million euros in 2008 (Scope,
big LE providers in the U.S. is currently
Jahrbuch 2008/2009).
for a transaction on the secondary
market) is USD 114 billion. The discrepancy between the USD 12.2 billion
actually traded in 2007 and the USD 114
billion potentially tradable corresponds
One of the main topics in the
U.S. life settlement market
which repeatedly crops up is
the subject of life expectancy
reports. Are there new insights
here?
conducting the largest study ever
undertaken. One million policies from
Thank you for talking with us.
the last decades are being checked in
a backtesting procedure for their projected and actual mortality data. These
data will facilitate further optimization
of the processes.
How are things expected to
continue now with the U.S. Life
Settlement market?
The market is growing dynamically
now and yields remain attractive.
According to the Conning Report
published in 2008, the annual volume
of maturity payments for the policies
traded will grow to USD 21 billion in
2012. In 2007 the corresponding figure
was USD 12.2 billion. Moreover, Conning
Research & Consulting estimates that
the average annual gross market potential for 2008 – 2017 (total maturity
28
investors in the long run.
I have been an advocate of Best
is the critical factor when it comes to
assessing whether investments in US
Practices for life expectancy underThe editor talks to the director of
LISA Task Force „Best Practice“, Mike Fasano,
President Fasano Associates
Best Practices are
necessary to
restore investor
confidence in the
life settlement
market
Not least due to the work of the
writers for a long time. In my opinion,
providers associated with the BVZL
Best Practices are necessary to restore
who offer closed-end US life insurance
investor confidence in the life sett-
funds in Germany, a continual opti-
lement market. LISA has taken the
mization process has been noted in
initiative of putting together a Best
recent years as regards life expectancy
Practices Task Force for Life Expectancy
providers in the US.
Underwriters, which I chair. This effort
also has been supported by ILMA
Since the beginning of 2009, a task
(Institutional Life Markets Association)
force of all prominent life expectancy
and Life Settlement Institute (LSI). Most
underwriters, headed by LISA Board
important, it has been supported by
member Mike Fasano, has been discus-
the life expectancy underwriters who
sing so-called “best practice” standards
are members of LISA and who serve
which, among other things, will make
with me on the Best Practices Task
it possible to compare and to measure
Force.
the different approaches and methods
of the individual estimators.
The Task Force has agreed on the basic
elements of Best Practices, which
The adjustment of the mortality tables
would include presenting actual to
by some of the leading life expectancy
expected results in a standardized
underwriters at the end of 2008 / be-
manner that would allow meaningful
ginning of 2009) (the basis and foun-
comparisons among the different LE
dation of every estimator in calculating
underwriters.
his LEs) which led to an extension of
the average life expectancy by as much
At this point, the only remaining issue
as 25% had far-reaching consequences
is development of a common mortality
for the entire Life Settlement industry
table to be included by all the under-
worldwide. It also generated controver-
writers in their actual to expected
sial discussions at the BVZL secondary
analyses. We expect this table to be
market summit meeting in Munich
completed by the end of the summer
season.
life settlements are worthwhile for
How might the adoption of
best standards and practices
affect the Life Settment market
and investors?
The quality of life expectancy reports
29
What will be the long-term
impact of the medical underwriter changes announced in
late 2008/early 2009?
As for comparisons between Life
life expectancy underwriters made
Settlement and Life Insurance under-
changes to their mortality tables that
writing standards, it is important to
had the effect of lengthening their
understand that Life Insurance under-
life expectancy estimates and thereby
writing is usually undertaken either by
resulted in significant market value
the issuing company or pursuant to its
reductions to existing life settlement
directions and guidelines. The risk taker
portfolios. Our firm, Fasano Associates,
sets the rules. Life Settlement underwri-
was not among those who made
ting, on the other hand, is performed
significant LE extensions, as our life
by independent underwriting organi-
expectancy estimates have historically
zations that often do not have a direct
been longer than the rest of the mar-
relationship with either the seller of
ket and we did not see a need for such
the life policy or the ultimate investor.
an adjustment. Although the short
Therefore, there is a greater element of
term impact of these changes was
public responsibility involved with Life
devastating to some market partici-
Settlement underwriting that makes
pants, I think the long term impact will
Best Practices more compelling.
be positive, to the extent that there is
In the fall of 2009, a number of the
more rationality in life expectancies
Should regulators establish
best standards and practices
for life expectancy estimators,
both in the Life Settlement
market and for life insurers?
and in pricing. What you will see,
My view is that Best Practices should be
from the market, while institutional,
developed and endorsed by the relevant
long-term investors, such as pension
Life Settlement trade associations, such
funds, will find it easier to participate.
as LISA, rather than by regulators. If the
trade associations don‘t accomplish
this, then the regulators will undoubtedly seize this initiative.
however, will be a change in some of
the participants in the market. Those
whose business models required short
life expectancy estimates will be driven
Should the best practices of
life expectancy estimators on
the life settlement market be
consistent with life expectency
estimators for life insurers?
30
Director of LISA.
The IRS rulings2) are confusing and
the drafting of them will need mo-
Doug Head, Executive Director
Life Insurance Settlement Association
(LISA)
Quick facts
The controversy over
STOLI (Stranger Originated
Life Insurance)
dification. Interestingly, they provide
Though STOLI may have been a small
to the existing industry. LISA and other
issue in earlier years, the policies with
interested parties continue to reach
the characteristics of STOLI that might
out to the IRS, the congress and others
have gone to market in 2006 or 2007
with proposals for modification of the
are having a tough time finding a
rulings or clarity in the law.
guidance for situations that are not
common and may not even be relevant
home today in any market. Meanwhile,
the courts have pretty clearly come
contest period will have claims paid.
Regulation of the Life
Settlement Industry
Efforts by insurers to expand that
As stated above, regulation in the sta-
contest period to five years for policies
tes based on the NCOIL is a continued
that go to settlement are not having
prospect and is a LISA supported ob-
much success, in the states or the
jective. By the end of 2010, if proposals
courts. The landscape of legislation in
now moving in New York, California
this issue is normalizing around the
and other states advance, we expect
down on the side that policies beyond
1)
NCOIL Model of clearly defining and
that the industry will be well regulated
banning (forever) true STOLI activity.
for over 90% of the American popula-
Consumers who decide to sell policies
tion with better understanding of the
still have that legitimate option in
option by consumers. We continue to
nearly all states after two years.
work toward uniformity in these rules.
1) National Conference of Insurance Legislators
2) Interpretations of the Ministry of Finance
„hot“ items from Doug Head, Executive
Life Settlements Sales May
Be Taxed as Capital Gains
A short commentary about some
31
The Exotic Markets:
Secondary Markets for Life Insurance
in Australia and New Zealand
ceeds certain limits for assets and
the most popular investment products.
income. At present, the three largest
This applies not only to recently con-
Australian life insurance companies to-
cluded policies. Investors can invest in
gether manage over 60 percent of all
ongoing policies today by buying them
policies with a total value of around 10
from the original owners. In Germany,
billion euros. The four largest compa-
business in life insurance policies only
nies in New Zealand also manage poli-
took off at the end of the nineties
cies valued at approximately the same
whereas in the Anglo-American world,
amount. The annual volume of trade
the market has been established for a
for secondary market policies in
much longer period.
Anyone interested in investing in this
asset class can either invest in entire
portfolios with a large number of diffe-
Life insurance is the most
popular form of retirement
provision in Australia and
New Zealand
rent policies or buy individual policies.
Australia comes to 25 to 30 million
For several years already, closed-ends
euros, and in New Zealand the compa-
funds have been marketed in Germany
rable figure is between 10 million and
which invest in British, American or
15 million euros. The annual cancellati-
German secondary market policies.
on volume is approximately ten times
Now for the first time, products with
as high, so there is sufficient opportu-
second-hand Australian and New
nity to expand the trading volume ac-
Zealand life insurance policies are also
cordingly if demand is higher.
available. Until now, most of these
“exotic” life insurance secondary mar-
In both countries, all rights and duties
kets were largely unknown to institu-
under the policies are transferred by
tional and private investors in Europe.
means of irrevocable assignment, and
However, due to their structure, they
the transfer is regulated by law. The
offer an attractive, low-risk diversifica-
regulatory agency in Australia is the
tion option.
APRA Life Insurance Section and in New
Zealand the ISI (Investment Savings &
In Australia and New Zealand, life in-
Insurance Association). Originally
surance policies are the most popular
policies are concluded as whole-of-life
form of retirement provision. In
policies which by means of a conver-
Australia, the uniform state pension is
sion option upon sale are converted to
more like a welfare benefit and is not
a conventional endowment policy. This
paid at all if the potential recipient ex-
results for Australian life insurance
Markets / New Markets
An endowment life insurance is one of
32
the higher the percentage of the gua-
years and in New Zealand terms of
ranteed payment during the contrac-
three to thirteen years. The policies carry
tual period and of the total result, the
very high guarantees which in many
more capital the insurer must invest in
cases amount to nearly 100 percent of
bonds which yield only weak returns at
the total expense (purchase price plus
present. In contrast, British companies
any future premiums still to be paid)
usually invest a higher percentage of
already at the time they are purchased.
the actuarial reserve funds in stocks.
There are therefore bigger opportu-
Insurance companies in Australia and
nities to profit more from rising stock
in New Zealand have a very high credit
prices over the long term. However,
rating and are very stable. Standard &
the risk is also greater that the result
Poor’s ratings range from A- to AA. In
for soon-to-expire policies will be
addition, the so-called Statutory No. 1
threatened by hefty closing bonus cuts
Funds on which the policies are based
if stock market prices fluctuate. In
are protected from insolvency. The
their investment policy, Australian and
companies invest around 55 percent of
New Zealand insurers are as little
the fund assets in fixed-interest instru-
restricted as British insurers, but they
ments and some 8 percent in real pro-
invest in a substantially smaller share
perty. The rest is invested in interna-
of stocks.
Insurance companies in Australia and New Zealand have
a very high credit rating and are very stable.
tional and national stocks. Altogether,
Furthermore, when investing in
bonus payments and the development
Australian policies, the foreign ex-
of the surrender values here have so
change risk must be taken into account
far been distinctly more stable than,
as well as the possibility of a rise in
say, in Great Britain.
the Australian or New Zealand dollar
against the euro. Against this back-
For the investor, Australian and New
ground, it would indeed make sense to
Zealand secondary market policies
diversify a British secondary market
are especially attractive because they
portfolio by adding Australian and
combine the safety of German life in-
New Zealand policies.
surance policies with the opportunities
for profits offered by British policies.
In Germany, insurance companies, with
a guaranteed annual interest rate of
currently 2.25 percent, are geared toward safety from the very beginning.
The share of the closing bonus is only
approximately 5 to 15 percent. However,
Author: Johann Kirchmair,
Allgemeiner Versicherungsdienst
Gesellschaft mbH
Märkte / Neue Märkte
policies in residual terms of five to ten
33
Regulation for
closed-end funds:
opportunity
for the industry
The policy makes the bottom line clear:
ders to sales, this will put closed-end
No part of the financial market should
funds on the same level as regulated
remain unregulated in future. This is
products such as stocks, bonds, and
the declared goal not only of the heads
stock and bond funds. The result would
of state of the G-20 countries but also
be more and better opportunities to
of the fractions in the German parlia-
compare products directly with each
ment which have positioned themsel-
other. And closed-end funds would
ves in this direction with the goal of
finally enable us to rid ourselves of our
distinctly broader investor protection
unwarranted reputation as dubious
by the end of 2008.
– because unregulated – investment
rectly in February with the amendment
of legislation governing debt securities
(Schuldverschreibungsrecht). Among
other things, the statutory period of
limitation for securities was extended
and additional documentation obligations were introduced. In a statement in
this context, the Federal Council urged
the federal government to present
“another draft to improve investor
Today, the industry
has a strong, constructive
network in the world of
politics and business.
Not only must the industry take
advantage of this opportunity but it
is well prepared to do so. The Investor
Protection Improvement Act which was
enacted in 2005 came about without
any noticeable participation of the
industry. Accordingly, some regulations
missed the special features of closedend funds and created considerable
problems for the industry when it came
to implementation and adjustment.
Today the industry is far better positioned. With the Closed-End Fund Association (VGF), providers of all asset classes
now have a common organisation to
protection in the grey capital market
represent their interests; BVZL additio-
formulating clear regulations for con-
nally represents the special interests of
duct and liability in this market too and
players in the secondary market for life
subjecting it to effective government
insurance policies. Thus today the indu-
controls.” Among other things, these
stry has a strong, constructive network
regulations include those on the pro-
in the world of politics and business.
fessional qualifications of brokers and
disclosure obligations for commissions.
This makes it obvious that closed-end
funds will be regulated in future. What
will this mean for the industry?
Spotlight
instruments in the grey capital market.
An initial regulatory step was taken di-
Already in February this year, the VGF
made its voice heard in the political
discussion with its “paper on key data
regarding regulation of closed-end
funds.” The paper sketches the ideas of
First and foremost, it should be seen as
the providers on what regulation could
an opportunity. With a legal framework
look like. Providers, products and sales
for all areas of the market from provi-
are purposely given equal attention
34
because only a proper regulation of all
funds are therefore also affected by AIFM
three areas together can really fulfil the
– without the draft guideline having to
requirements of the market. The goal
actually take their specific features into
is a legal framework which will create
account. Individual requirements such
stable legal and tax conditions for the
as risk and liquidity management and
industry over the long term.
requirements on ongoing assessment of
A look at Brussels shows just how important it is for associations to position
themselves in political processes early
assets are very difficult to implement in
the present form in actual practice with
closed-end funds.
The review of current national and
actors work rapidly under the strong
European regulating activities demon-
pressure exerted by the financial crisis.
strates the importance of political work
A draft directive published at the end of
just now for the industry. The question
April provides for extensive admission
about regulation of closed-end funds is
and regulatory requirements for Alter-
no longer a question of “whether” – the
native Investment Fund Managers (AI-
question is “when” and “how.” Infor-
FM). The crux in the draft is the broadly
mation and enlightenment of political
defined scope of application. Contrary
players is therefore just as important
to some reports in the media, it is not
as continuous participation in current
limited to managers of private equity
political processes. Only when this is
and hedge funds but includes the ma-
accomplished will the opportunity have
nagement of all products which are not
strengthened the industry and equipped
already specified in the European UCIT
it to put the financial crisis behind it as
investment fund guideline. Closed-end
soon as possible.
Author: Eric Romba, General Manager,
Verband Geschlossene Fonds (VGF)
Spotlight
on. At the European level, the political
35
The companies and service providers as-
Our experts are pleased to serve you as
sociated in the Bundesverband Vermö-
competent partners with regard to all
gensanlagen imZweitmarkt Lebensver-
aspects of the secondary markets for life
sicherungen (BVZL) e.V. are engaged in
insurance policies.
the secondary markets for life insurance
policies all over the world.
Full Members:
BVZL‘s primary object is developing in-
- Augur Life Management GmbH & Co. KG
- Allgemeiner Versicherungsdienst Gesellschaft mbH
- Berlin Atlantic Capital AG
- BLLW Braun Leberfinger Ludwig Weidinger
- BVT Life Bond Management GmbH
- cash.life AG
- CFI FAIRPAY AG
- Coventry
- Deutsche Bank AG
- Dr. Peters GmbH & Co. KG
- HSC Hanseatische Sachwert Concept GmbH
- Ideenkapital AG
- König & Cie. GmbH & Co. KG
- Life Bond Management GmbH
- Life Bond Lebensversicherungshandelsgesellschaft mbH
- Orca Finance
- Policen Direkt GmbH
- Wealth Management Capital Holding GmbH
- WestLB Life Markets GmbH
dustry standards for transparency and
Promotional Members:
Since its establishment in May 2004,
the Association has served as uniform
representation of economic, legal and
political interests and has been in constant dialogue with politicians, opinion
leaders, the public and other lobbying
groups to further promote the dynamic
development of the industry.
comparability of the various investment
segments (British, German and American life insurance policies) and steadily
improving the preconditions for successful investment in these asset classes that must be viewed on their own
merits.
The stronger interest of market participants, media, and consumers in the
secondary market for life insurance policies reflects the growing importance
and successful work of the BVZL. The
increasing professionalization and insti-
- 21st Services
- Abacus Settlements, LLC
- Baker & McKenzie
- City Endowments Limited
- CREDIT SUISSE SECURITIES (USA) LLC
- demark AG
- DLA Piper UK LLP
- Ernst & Young AG Wirtschaftsprüfungsgesellschaft
- HypoVereinsbank
- The Endowment Policy Purchasing Company Limited
(IFG Teppco)
- ISC Services
- ArensJäderberg GmbH
- Legacy Benefits, LLC
- LexNet
- Cantor LifeMarkets
- LIFE INSURANCE SETTLEMENT ASSOCIATION
- LSA Endowments
- MM Insurance Service
- Peachtree
- The Peninsula Group, LLC
- PolicyPlus International PLC
- Progressive Capital Solutions, LLC
- Sarastro-Finance GmbH
- Surrenda Link Limited
- Wells Fargo Bank, N.A.
tutionalization prove that the markets
for second-hand life insurance policies
have matured.
Imprint
Publisher
Responsible for Content
Concept and Realisation
Editors
Address
BVZL e.V.
Thomas Laumont, Vorstand
NBB Kommunikation
Lothar Trummer (NBB)
BVZL e.V.
Daniela Rieber (NBB)
c/o WealthCap
WMC34
Arabellastrasse 14
81925 Munich
Short BVZL Profile
BVZL – The leading
association of the
Secondary Market
for Life Insurance
Policies Sector
36
Strategic client
partnerships rely on
three qualities.
Intelligence.
Strength.
Access.
A proven market leader, Credit Suisse is one of the few large institutional players to operate in all segments of the life
settlements market – originating and distributing in both physical and synthetic formats. Credit Suisse has a large,
highly skilled team of over 90 professionals, based in New York, London and Hong Kong, dedicated to the
longevity/mortality marketplace.
To learn more, please contact us at +1-888-905-LIFE
www.credit-suisse.com
Thinking New Perspectives.
This advertisement has been approved solely for the purposes of Section 21 of the Financial Services and Markets Act 2000 by Credit Suisse Securities (Europe) Limited of One Cabot Square, London E14 4QJ. ©2009
CREDIT SUISSE GROUP and/or its afﬁliates. All rights reserved.

Secondary Markets for Life

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