Congratulations to The Insurance and Investment Journal for a well written and informative article (Viatical settlements stage comeback to insurer’s chagrin, April 2014).I concur with the comment attributed to Daniel Kahan in the article:
“Beyond the ethical problems it may raise, this practice skews insurers’ lapse assumptions, which is what irks them most, Kahan contends.”
This is a concern, from a consumer interest perspective, that I have raised to Daniel on numerous occasions, along with what I believe may be a potential solution. The solution to this concern may be to invite insurers to offer a “securitizablity rider” (IMO, when a life policy contract is sold to investors it becomes a security instrument). To expand:
Lapse assumptions, as we all (should) know are factored into the pricing of life insurance; much has been written on this subject. It is reasonable to assume/expect that the purchaser of a securitized life insurance policy will not lapse the policy itself, thus meriting a nil lapse assumption and the corresponding attributed added risk and risk transfer cost. It would be grossly unfair to stab consumers who purchase life insurance for traditional needs – transfer of insurable interest risk to the risk pool (the insurer) – with the added costs resultant from zeroing out the lapse assumptions.
The potential solution – to invite insurers to price the zeroing out of the lapse assumption and to offer that as a “securitizability rider”. The “securitizablity rider” would be an optional rider that could then be bought by consumers to provide the option of securitizing the contract with the insurer at a FMV to be established by accredited and regulated professional independent actuaries.
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Editor’s note: This letter was previously published on www.foradvisorsonly.com, an online industry discussion forum
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