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Last year, Capstone spoke of the importance of monitoring certain factors as the policy supply and investor demand for life settlements grows. There is still much empirical evidence supported by economic, regulatory and legislative activity affecting the life settlement industry. As retiring insureds seek to monetize life insurance assets and investment capital seeks higher yields, both contract supply and consumer demand are poised for steady, continued growth.
A significant portion of the population is entering retirement. This fact is a primary driver supporting the life settlement industry’s expectation that the supply of life insurance contracts becoming available in the life insurance secondary market will continue to climb.
The days of a prolonged low interest rate environment appear to be over. The potential to still earn attractive, risk-adjusted yield is creating demand for life settlements as a viable alternative investment. Life Settlements also provide investment stability as interest rates potentially rise and markets face instability.
The regulatory view of the life settlement asset class has stabilized to further fuel the industry’s growth. The number of insureds becoming aware that there is a favorable alternative to lapsing or surrendering an unwanted or unneeded policy is swelling. As the life settlement asset class gains visibility to sellers, investor demand is likely to move in lockstep with policy supply trends.
In 2016, the overall number of policies settled in secondary market transactions increased comparatively from the prior year by over 23% from $1.7 billion to $2.1 billion in U.S. life insurance face amount settled according to The Conning Report.
To support supply forecasts, the overall trade market for life settlements reportedly shrunk due to a large block of older contracts maturing. As a result, the third-party market contracted from $29.8 billion to $25.1 billion year over year. With an active and growing consumer appetite for new settlement supply coupled with shrinking third-party inventories, an imbalance exists that will drive industry activity toward an increased volume of secondary market transactions.
Notable advancements have been made to life expectancy assessment practices as this is an actively debated and closely monitored element of the life settlement industry. Although human mortality is difficult to predict, actuarial and medical science methodologies are advancing to improve life expectancy forecasting.
A last impacting factor to impact the Senior Life Settlement supply flow is tax reform. Lifetime estate tax limits, changes to charitable giving and other potentialities will have important ramifications for the life settlement industry. New supply will be created from individuals becoming over-insured.