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SMLICs: Consumer Demand and Contract Supply Increasing

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There is 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. It is important to monitor certain factors as policy supply and investor demand for SMLICs grows.

The following are some of the key factors that support continued growth in SMLICs:

  • An Aging Population A significant portion of the population is entering retirement. This fact is a primary driver supporting the industry’s expectation that the supply of life insurance contracts becoming available in the life insurance secondary market will continue to climb.

  • Increasing Awareness of Asset Class The number of insureds becoming aware of this favorable alternative to lapsing or surrendering an unwanted or unneeded policy is swelling. The regulatory view of this asset class has stabilized to further fuel the industry’s growth. As the life settlement asset class gains visibility to sellers, investor demand is likely to move in lockstep with policy supply trends.

  • Attractive Yield Potential 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 SMLICs as a viable non-traditional investment. SMLICs also provide investment stability as interest rates potentially rise and markets face instability.

  • Improved Life Expectancy Forecasting Notable advancements have been made to life expectancy assessment practices as this is an actively debated and closely monitored element of the industry. Although human mortality is impossible to predict with certainty, actuarial and medical science methodologies are advancing to improve life expectancy forecasting.

  • Tax Reform A last impacting factor to impact the SMLIC 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.

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 SMLICs 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.

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