When an official from the Financial Services Authority, London, spoke before the life settlement industry on February 24, he raised the issue of investor safeguards that the FSA would like to see in place, echoing efforts to strengthen the life settlement market which had been discussed in earlier panel sessions during the Life Settlement Trade Mission here.
Peter Smith, the FSA’s head of investment-the policy department, cited concerns that included product design, the mitigation of risk and offering well developed products with properly detailed risks.
Prior to Smith’s luncheon discussion, executives in the life settlement industry participated in several panel discussions on how to make the industry better by strengthening areas including education and transparency.
The panel sessions are part of the four day Trade Mission effort to reach European investors in London, Luxembourg and Zurich from Feb. 23-26. The Trade Mission is being jointly sponsored by the Life Insurance Settlement Association, Orlando, Fla., and the European Life Settlement Association, London.
Simon Erritt, a managing director with Coventry, cited three guiding principles during a panel on best practices to help ensure understanding of the product: education, transparency and objectivity. Education, he says, should be both for potential sellers as well as investors, both current and potential. That education should include information about changes in law, the value of investment and any other points that will help make the market more transparent, Erritt, continued. He also urged investors to take the time to learn about the market and its risks, or to find a trustworthy representative to help ensure that there is an understanding.
Both Scott Gibson, a vice president with Lewis & Ellis Actuaries & Consultants and Bryan Freeman, president of Habersham Funding, LLC, said that life settlement companies are not doing anything differently than life insurers who sell annuities and government and pension plans which benefits from earlier deaths.
Brian Smith, CEO of Life Equity LLC, discussed ways to mitigate origination risk and, thus, help strengthen the industry’s perception. He said, for instance, that it is important to understand who the provider by conducting due diligence on that provider. If a provider is only licensed in one or two states that should be a flag, according to Smith. For a better understanding of providers, Smith also suggested that sources may be banks that operate as trustees and LE underwriters.
And, Ian Cotgias, a senior actuary with SL Investment Management, cited the importance of maintaining sufficient liquidity in a portfolio and added that the way liquidity is maintained also needs to be thought through. For instance, he noted that if a bank facility is being used, there is always the risk that the terms may be changed or the facility withdrawn.
Larry Simon, president and CEO of Life Solutions International, said that with securitizations around the corner, it is important to ensure the quality of originations. If quality can be ensured, then securitization can be a steady source of funds, he added. Simon said that to properly securitize a portfolio it is probably necessary to have 300-400 policies at a minimum and that the diversity of carriers and their ratings are also important.
Choosing partners is key, according to Steven Shapiro, president and CEO of Q Capital Strategies, LLC. “Over the years, I have seen that not all origination is created equally.” He added, that one can’t underestimate due diligence done on a policy by policy basis. For instance, he said if an agent presents three policies in a row, it would be worth picking up a phone and finding out what is going on. He also recommended working with licensed providers.
The lack of transparency that occurred in the early years of the industry is being replaced with better information for the investor and better sales practices, according to Mark Goode, CEO of Secondary Life Capital. It was not a failure of an asset class but a failure of a structure in which fractionalized policies were sold, he continued.
Source: Jim Connolly, Life Settlement Review