Life settlement ABS deals have been gaining traction in the securitization market in recent years, but some experts worry that recent proposals by the National Association of Insurance Commissioners (NAIC) will restrict the flow of underlying assets for premium financings, which fall under the same category, and cause that market to slip.
The group's life insurance and annuities committee voted to recommend that the organization impose a five-year ban on policies that are financed with the specific intent to be sold to investors. If the NAIC passes the measure, then individual state insurance regulatory agencies will have to decide whether they want to enforce the ban. In general, the ban amends its Viatical Settlements Model Regulation, which covers viatical settlements and related financings such as life settlements, senior settlements and premium financing. Life settlement bonds are backed by future proceeds from life insurance policies. They are also called senior settlement bonds, because most of the sellers behind the policies are senior citizens, usually 70 years old or older. In premium financing, a bank lends funds to an insured, to help them meet premium payments. Similar to life settlements, repayment is backed by future death benefits from the policies.
The insurance industry ultimately loses out on life settlement - and similar - transactions, because the practice upsets the industry's actuarial assumptions on the life expectancy of the insured. Frequently, life insurance policyholders allow the policies to lapse, in which case the insurance company collects a windfall in premiums without ever having to pay benefits. That scheme is derailed once the policies make their way into the securitization market, where investors keep paying out on the policies, and the insurance company will likely have to pay out a settlement.
The NAIC's proposed ban could affect premium financing as many premium finance loans that are currently being done could be considered life settlements. If the NAIC adopts the proposal and it is implemented by individual states, it might deprive consumers the option of using premium financing to meet payments on life insurance policies, said Boris Ziser, a partner in the structured finance practice at law firm Brown Rudnick.
"Current revisions to the act will create an issue for a lot of premium finance programs, unless they are full recourse programs," wherein the bank has recourse to the insured for the loan.
Dealmakers expect to complete between $10 billion and $15 billion of life settlement deals this year, up from about $10 billion in 2005 and about $5 billion several years before that, Ziser said. Market players expect life settlement deals to continue, even if the ban is imposed.
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