Agency Sees Secondary Life Market Expanding

Moody's analysts note that fewer than 1% of life policies in force may fit life settlement companies' purchase criteria.

The analysts cite an industry rule of thumb holding that a suitable policy is at least $750,000 in face amount on an insured with an attained age of at least 65.

Although the number of eligible policies may be relatively small, the eligible policies may represent a significant percentage of total U.S. outstanding policy cash surrender value, the analysts write.

Insurers that issue or have issued lapse-supported products are at most risk if the life settlement market continues to grow, the analysts write.

Lapse-supported products are issued based on the assumption that a certain percentage of those policies will be lapsed by their owners. The money made on these policies supports policies that are kept in force. However, if such policies are kept in force, the profit from them is not available to cover losses and face amount will come due on the death of the insured, the analysts write.

If investors buy these contracts, the "chance of premature lapse of the product becomes virtually nil," the analysts write.

"Betting against efficiency is something that companies have to be careful about," Fliegelman says.