Reasons abound as to why an American would sell their life insurance policy to a third-party investor, including paying off a mortgage, funding a divorce settlement, or paying medical bills; it’s something of a safety net in times of financial need.
Many other countries don’t have a similar safety net available to their citizens. The UK has a traded endowment policy market, but that’s now largely defunct. Enter Germany, which does, and one consequence of the prevailing macroeconomic environment, where residents of most countries in Europe are experiencing cost of living challenges, is that more people with a life insurance policy in Europe’s largest economy are looking into selling it on the secondary market.
“The size and volume of trades on the German secondary market depend on the existing economic situation,” said Christian Seidl, Executive Board Member at Bundesverband Vermoegensanlagen im Zweitmarkt Lebensversicherungen (BVZL), a trade association in Germany that represents investors in the secondary life market in the country. “In the first half of the year, we saw an increasing number of people coming to us and asking questions about selling their policy because of all this uncertainty, increasing inflation, interest rates, etc. People feel a need to liquidate their assets.”
A life insurance policy in Germany is as much a part of a retirement plan as it is a worst-case-scenario plan; it’s a sort of savings account, because if the policy holder is not deceased at age 65, the policy pays out anyway, giving the recipient a lump sum to do with what they choose.
The supply side of the German secondary life market is robust. Many Germans have life insurance and citizens have access to information through organisations like the BVZL to help them make informed decisions regarding whether selling their policy is the right decision for them. Contrast that with the United States, where fund managers and brokers often comment that awareness amongst policyholders – or, rather, a lack of it – is a significant supply barrier.
That contrasts with the buyer side. In the U.S., talk to any life settlement fund manager and they will tell you that access to capital to buy policies is not a roadblock on the route to success. Capital is aplenty, demand is high, driving up prices – and therefore, driving down returns.
In Germany, investors face a different dilemma. The German secondary market is, from an investor’s perspective, largely an interest rate arbitrage. Life insurance policies contain both a guaranteed interest rate for the life of the policy, and an annual surplus which is based on the profitability of the life insurance company itself. Policies issued in the 1980’s or 1990’s were highly attractive for investors because they came with comparably high guaranteed interest and at the same time, refinancing costs were low in a low interest environment.
Newer life insurance products, however, come with no, or only very low, guaranteed interest. This doesn’t make much difference in a low interest environment but today, in an environment of increasing interest rates and refinancing costs, it becomes less attractive to purchasers. According to Seidl, there are already signs of a bump in the road.
“We’re definitely seeing a slowing down at the moment. Just in the last few weeks we’ve seen a decrease in the number of trades because of rising interest rates. For the purchaser, buying policies becomes less attractive. They’re currently purchasing very selectively,” he said.
Getting an accurate measure of the in-force size of the U.S. life settlement market is difficult; a recent reader poll conducted by Life Risk News showed that the industry itself doesn’t really know. The German secondary market is much, much smaller – BVZL estimates that it’s a few hundred million Euros – and the short-term outlook remains unclear because it depends heavily on the long-term expectations of insurance companies and policy purchasers regarding interest rates and refinancing costs, which are uncertain at the moment. But it remains robust and enjoys a lack of controversy that isn’t always the case with the life settlement market.
“We don’t have the ‘profiting from death’ discussion that the life settlement market does because our market is just an interest rate arbitrage market. The policies pay out even if the insured person doesn’t die,” said Seidl. “We [BVZL] have a good relationship with the consumer agencies and they understand that the policy holders just want to liquidate an asset for whatever reason. The regulatory environment doesn’t have a lot of activity, and so the outlook for the industry is really just closely tied to the interest rate environment.”