On Sept. 16, Americans got to live a little longer.
On that date, 21st Services, one of the leading providers of life expectancy estimates for the life settlement industry, officially adjusted its mortality tables to reflect more real-world expectancies. These changes include an increased life expectancy for every population except those with impaired health.
Doug Head, executive director of the Life Insurance Settlement Association (LISA), explained how such changes in mortality tables will affect transactions for life settlement producers.
"In the very simplest way, a longer life expectancy means more premium payments and an extended period before maturity, hence a lower return on the investment," he said. "A shorter life expectancy, if it is accurate, means a lower premium alley and a more rapid return on the investment."
In a life settlement, a third-party investor purchases a life insurance policy from a policyholder who no longer wants or needs it, and that investor begins paying the premiums. The policyholder receives an amount greater than the surrender but less than the death benefit. When the policyholder dies, the investor receives the policy proceeds as a beneficiary. As Head indicated, however, life insurance policies held by the 65-plus set could potentially become less attractive if policyholders are deemed to be living longer.
Expectancy confusion
According to Robert Finfer, president and CEO of Integrity Settlement Group Inc., an agency specializing in life settlements, 21st's decision has thrown the entire market into disarray.
"21st is a company that practically every funding source, every provider in the marketplace, uses," he said. "So many of the transactions, even the transactions that were literally at the funders, have now been rescinded because of the changes."
Head said that the changes have caused some stress in the industry, and there will definitely be a period of adjustment.
"People who have bought policies with 21st [life expectancies] are assuming those numbers to be accurate," he said. "If they now find that there's going to be a significant change in those numbers, they're going to have to rethink their portfolio and what it's worth. Similarly, people who've had policies in the pipeline, if those estimates are now being altered, obviously those changes will slow down the marketing of those policies because they've suddenly got new numbers allied to them."
Finfer discussed some of the problems that have recently arisen on the consumer end.
"[There have been] articles that reference that a client should expect to receive, on average, 20 percent of their face amount," he said. "Now, we all know that that's the average, and even in that average there are some people that get 5 percent and some people that get 40 percent. But, I think with the changes in life expectancy that average is going to go down, so for a client that was expecting to get that 20 percent, now you have a situation where the value could drop to 15 percent."
Arriving at the new numbers -- the "how"
Vince Granieri, chief actuary for 21st Services, said that at least twice a year, 21st reviews its mortality experience and compares it with expected results to ensure that the mortality tables the company used to estimate life expectancies relate well to its actual experience. He said that the process 21st used in its recent change to its mortality tables has three steps.
The first step, he said, was to analyze 21st's experience and create a mortality table that reflects that experience. But, because the life settlement industry is relatively new, 21st Services could only go on reliable experience for the past five years.
So, 21st looked at the Society of Actuaries' 2008 valuation basic tables (VBT), a set of mortality tables based on life insurance policy experience from multiple companies.
However, because the VBT is designed for use during the individual life insurance valuation process, Granieri said it is not an appropriate source of mortality information for use in the life settlement market. For example, the VBT grades to population mortality at upper ages, which is conservative for life insurance companies, but aggressive for life settlements. Also, the VBT excludes claims for $2.5 million and higher in order to remove fluctuations from a few high claims; 21st put these claims back in to better reflect this important segment of the life settlement market.
Then, 21st combined the two different tables -- the company's own experience tables (which gave mortality for the first five years) and the industry's VBT (which gave mortality for 11 years and beyond). For the years in between, Granieri said they graded the experience between the two tables.
"For example, for year six we used 80 percent of the first five years' experience and 20 percent of the ultimate experience, then for year seven we used 60 percent of the first five years and 40 percent of the ultimate experience, etc.," he said.
That assessment led to some changes, most of which resulted in an increased life expectancy.
"The younger, healthier males extended the most," Granieri said. "The smokers extended the least, and males extended more than females."
Granieri did note, however, that several expectancies did not change much, and some, such as those with highly impaired health, actually decreased.
What does this mean to you?
The long-term effect of these life expectancy adjustments is uncertain, but Granieri believes that the constant evaluation of mortality tables will only serve to create more legitimacy in the industry.
"I've talked to [many investors] since we made this announcement, and every one of them said this is a good thing for the industry," he said. "It will lead to more confidence in life expectancy providers overall because [the investors] feel there is what they call a convergence of opinion among life expectancy providers. They felt [our life expectancies] were a little shorter than the other competitors', and they were adjusting our tables. So I think in the long term, this gives the investors more confidence that we will continually strive to provide the most accurate life expectancies we possibly can, given the data we have."
Some of 21st Service's competitors are responding to the mortality table changes. For example, Global Life Underwriting (GLU) held a webinar responding to 21st's announcement. The Web event, "Demystifying Life Expectancy Reports: A Response to the 21st Services Announcement," was launched in conjunction with GLU's announcement that it would begin providing life expectancy reports -- a service it did not perform in the past.
According to the text of the webinar, GLU believes that the VBT is the "gold standard for determining LEs." The company maintains that it is the only firm that offers life expectancies based solely on VBT standards and said it won't make "arbitrary changes to the underlying mortality tables."
Howard Freedland, CEO of GLU's par-ent company, Lido Ventures, said in an email to the Agent's Sales Journal that GLU began offering life expectancy reports (LERs) in order to better support its life settlement business so it could purchase assets for a hedge fund it is buying.
"After the 21st Services announcement, we were asked by several financial buyers, providers, and brokers to explain our methodology," he said. "This led to several institutions asking us to provide LERs for them. We have decided that the LS [life settlement] market requires ... consistent, accurate, reliable, accountable, transparent-based LERs so that investors can buy assets with confidence."
Freedland added that GLU uses the 2008 VBT tables exclusively because the company feels those tables are the most accurate.
Despite his concerns about the initial effect of the life expectancy adjustments, Finfer believes that the industry will ultimately continue to grow.
"I think you're going to see more and more competitive pricing and great buyers even with the changes in life expectancy," he said.
Heather Strickland is the associate editor for Agent's Sales Journal. She can be reached at 800-933-9449 ext. 225 or HStrickland@AgentMediaCorp.com.
