Life settlements securitization issue heats up

The American Council of Life Insurers (ACLI), which represents nearly 300 life insurance companies, stirred up a hornet's nest recently with its Feb. 3 policy statement asking legislators to ban the practice of securitizing blocks of life settlements.

ACLI's statement asserted that packaging life insurance settlements into securities increases the risk of fraud, by encouraging securitizers to lure seniors into participating in illegal, stranger-originated life insurance transactions; by encouraging seniors to help file fraudulent STOLI applications; and by encouraging investors to buy life settlement-backed securities without understanding the risks involved.

ACLI further asserted that uncertainty about life expectancy makes rating life settlements difficult, and therefore they cannot be properly underwritten and are likely to fail economically. (Click here to read ACLI's complete policy statement).

Critical reaction from industry organizations with a stake in life settlements was swift.

On Feb. 4, Washington-based Institutional Life Markets Association released a response to ACLI's statement. "Once again, ACLI has chosen to mix apples and oranges when condemning the life settlement market. The recent policy statement issued by ACLI concerning securitization of life settlements is misplaced and incorrect," said ILMA Director of Government Affairs Jack Kelly.

(To read ILMA's complete statement, click here)

The Insurance Studies Institute (ISI), a non-profit research think tank focused in part on researching and analyzing challenges and opportunities within the field of insurance-based risk management, responded with a critique of ACLI's policy statement on Feb. 5.

Here's a brief excerpt: "Policymakers need to realize the true intention of ACLI and the life insurance industry appears to be destruction of a vibrant secondary market for life insurance, thereby denying seniors the option and right to realize full market value for their unwanted, unneeded and unaffordable life insurance policies. Such action by the life insurance industry is a slap to all life insurance policyholders, particularly seniors. Public policymakers should insist that consumers purchasing life insurance deserve the option a secondary market may provide."

(To read ISI's complete critique, click here)

The eventual outcome of the whole securitization of life settlements issue, which gained widespread attention when The New York Times ran a Sept. 5, 2009 article titled, "Wall Street Pursues Profit in Bundles of Life Insurance," remains to be seen.

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