Outlook for life settlement funds in 2025
February 2025 | TALKINGPOINT | FINANCE & INVESTMENT
Financier Worldwide Magazine
February 2025 Issue
FW discusses the outlook for life settlement funds in 2025 with Corwin Zass and Brian Forman at Actuarial Risk Management.
FW: Could you provide an overview of the key trends currently impacting life settlement funds? How would you characterise interest and activity levels in this market?
Zass: Life settlement funds, like investors directly holding them, are influenced by several key trends, including the impact of life expectancy (LE) estimates – real accuracy versus perceived or reported, new untested LE underwriting assessors – with a heavy reliance on the credibility of underwriters, whether the life insurance industry will look to punish the broader life settlement market, and the impacts from the recent PHL Variable Life Insurance Company rehabilitation. LE estimates are crucial for valuations, with more vendors providing these estimates, though comparisons remain challenging without standardised studies. Interest rate fluctuations, particularly the rise in 10-year US Treasury rates, have impacted discount rates, making life settlements less attractive compared to other investments, but the predicted forthcoming declines may once again increase investor interest. The long-term effects of coronavirus (COVID-19), especially long COVID, have necessitated adjustments in mortality improvement assumptions. Economic challenges and rising insurance costs have led more policyholders to consider life settlements, though awareness remains limited. The market is maturing, focusing on enhancing transaction speed, reducing friction and increasing transparency, making the process more efficient and attractive to both policyholders and investors.
FW: What are the main drivers of demand for life settlement funds? How do the benefits of diversification and returns offered by life settlement funds compare with those of traditional investments?
Forman: The demand for life settlement funds is driven by an ageing population, rising healthcare costs, economic pressures, increased awareness and investor demand for high returns. Life settlement funds offer diversification benefits due to their low correlation with traditional markets and predictable cash flows based on LE estimates. As a result, they serve as an excellent hedge against market volatility. They can provide attractive returns, often higher than traditional fixed-income investments, with high single-digit to low double-digit annual returns. Despite the inherent longevity risk, the returns from life settlements can be appealing on a risk-adjusted basis, especially compared to the current low yields in traditional markets.
FW: How have interest rate levels and macroeconomic uncertainty influenced decisions in the life settlements market?
Zass: Higher market interest rates increase the discount rates used in life settlement valuations, reducing the present value of future cash flows and making life settlements less attractive compared to other investments. Rising interest rates can lead investors to seek more traditional fixed-income investments, reducing demand for life settlements. Economic uncertainty can lead to increased market volatility, making life settlements more attractive as they are generally uncorrelated with traditional financial markets. Inflation can erode the value of fixed-income investments, making life settlements more appealing, though it can also increase the cost of maintaining life insurance policies, prompting more policyholders to sell their policies. Keep in mind that economic uncertainty can lead to increased activity in the secondary market as life insurance policyowners react and desire to raise cash, potentially by selling their policy.
“Regulations have significantly boosted consumer and adviser confidence in the life settlements market by ensuring transparency, fairness and protection.”
FW: How accurate are life expectancy (LE) assessments? To what extent has the underwriting process, and methodologies used, advanced over the years?
Forman: LE assessments have varying degrees of accuracy, influenced by the methodologies and data used. Predictions for short-term and long-term periods tend to be more accurate, while intermediate periods are less so. Modern underwriting processes incorporate a wide range of data, including detailed medical histories, lifestyle factors and genetic information, improving accuracy. Advances in technology, such as machine learning and artificial intelligence, have enabled more sophisticated modelling and analysis. Improved actuarial models and increased standardisation and regulation have also contributed to more precise LE estimates, making them a valuable tool in the life settlements market. Yet the traditional LE assessments and their vendors have not varied too much their historical methods.
FW: In what ways is the legacy of coronavirus (COVID-19) affecting projections and pricing for life settlements?
Zass: The legacy of COVID-19 has led to higher mortality rates, particularly among older adults and those with pre-existing conditions, which impacted LE estimates during those periods. Long COVID has introduced additional uncertainty into mortality projections, necessitating adjustments in underwriting practices and leading to mortality adjustments reflecting excess mortality and broader health impacts. Economic uncertainty caused by the pandemic has led to higher discount rates in life settlement valuations, reflecting increased risk and uncertainty. The pandemic has also increased the supply of life insurance policies on the secondary market as policyholders look to liquidate assets for cash, while investors have become more cautious, emphasising risk management.
FW: To what extent are regulations boosting consumer and adviser confidence in life settlements? What developments would you highlight on this front?
Forman: Regulations have significantly boosted consumer and adviser confidence in the life settlements market by ensuring transparency, fairness and protection. Consumer protection laws require insurers to inform policyholders about life settlement options, helping consumers make informed decisions. Standardised practices and regulatory oversight ensure consistency and fairness, building confidence among advisers and consumers. Recent regulatory developments have focused on enhancing disclosure requirements and consumer education initiatives, helping to demystify the process and build trust. Technological advancements and favourable tax reforms have also made life settlements more financially attractive, encouraging more policyholders to consider them as a viable financial option.
“Economic uncertainty can lead to increased market volatility, making life settlements more attractive as they are generally uncorrelated with traditional financial markets.”
FW: Could you outline the impact of the PHL Variable Life Insurance Company rehabilitation?
Zass: The rehabilitation of PHL has had significant impacts on the life settlement industry. The Connecticut Insurance Department’s petition for rehabilitation aims to protect policyholders and ensure the financial stability of PHL and its subsidiaries. A temporary moratorium on death benefit payouts has been placed, limiting them to $300,000 until a rehabilitation plan is developed, impacting expected returns for investors holding PHL policies. The rehabilitation has highlighted the importance of thorough due diligence and prudent counterparty risk management. While it introduces short-term uncertainties, it is expected to lead to a more stable and resilient life settlement market in the long run, emphasising the role of regulatory oversight in maintaining market integrity.
FW: What are your expectations for the growth of the life settlements market throughout 2025 and beyond? Are we likely to see a robust market for life settlement transactions?
Forman: The life settlements market is expected to experience significant growth in 2025 and beyond, driven by the ageing population, economic factors, increased awareness and regulatory support. The ‘silver wave’ of ‘baby boomers’ reaching retirement age is expected to drive demand for life settlements. Higher interest rates, inflation and market volatility make life settlements an attractive option for policyholders and investors. Awareness of life settlements is growing among policyholders and financial advisers, leading to an expanding market. Continued regulatory support and consumer protection measures are likely to boost confidence in the market, encouraging more transactions and fostering a robust market for life settlement transactions.
Corwin Zass provides Actuarial Risk Management with both strategic direction and technical expertise. As a trained life actuary for close to 30 years, he has advised on topics such as M&A, product and risk management, capital strategy and financial reporting paradigms. Mr Zass regularly advises global clients on mortality, morbidity and other risk matters important to those participating or investing in the insurance space either directly or indirectly, including life and structured settlements. He can be contacted on +1 (512) 345 5200 or by email: czass@actrisk.com.
Brian Forman leverages his knowledge of life insurance companies and their products to provide a deep understanding of the risks and pitfalls of investing in life settlements as well as the benefits. He has developed and refined the Actuarial Risk Management model that provides life settlement analysis, and his 14 years as senior consulting actuary with the firm are an important component of his 43 years of actuarial experience. He can be contacted on +1 (512) 345 5200 or by email: bforman@actrisk.com.
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