For life settlement investors, potential increases in the Cost of Insurance (COI) component of a life insurance policy represents a risk that needs to be considered when valuing a policy for a potential purchase.
That risk is very much on the radar of fund managers in the space. In recent years, COI increases from life insurance companies have been followed by lawsuits against the carriers; these lawsuits, which have tended to be class action lawsuits on behalf of a group of policyholders (before these policies even become life settlements) accused life insurance companies of illegally increasing this cost.
Specifically, plaintiffs argued that carriers should not have targeted certain age groups and raised rates as much as they did. Most of the increases, which did not happen frequently until around six years ago, were modest, ranging from five percent to ten percent, but in some cases, they reached triple digits; one case showed a 300 percent rise. And these increases were generally for insured individuals 61 years old and older, which is the target market for life settlement investors.
It appears, however, that summary judgements are not being awarded for the most recent wave of COI increase cases, many of which were filed in 2015 and 2016. As United States District Judge Jesse M. Furman of the Southern District of New York warned in March 2022 regarding the closely watched Brach Family Foundation Inc., et al vs. AXA Equitable Life Insurance Company case, this could lead to a lengthy and costly trial for the parties involved, making forecasting difficult for the life settlement market.
“It’s too early to see what insurers will do next, partly because litigation is still pending and partly because the insurance companies know they’d have a hard time justifying rate increases right after raising rates,” said Khai LeQuang, Partner with Orrick Herrington & Sutcliffe LLP in Orange County, California.
Another area that life settlement investors have their eye on is a lack of policy illustrations. Many carriers have yet to unveil these as they work the numbers before making their announcements; mortality rates have improved for some class of insured individuals, rather than worsened, over the past three decades, and people are generally living longer than predicted several years ago when these policies were priced. That would support a decrease, not an increase, in COI rates, but regardless, Steven G. Sklaver, a Partner with Susman Godfrey LLP in Los Angeles, said this could be an indicator of what is next:
“As often is the case, when a life insurance company stops illustrating policies, the carrier claims that it can’t illustrate any further or can illustrate only to the guaranteed maximum – that’s probably because a COI increase might be coming down the pike.”
Other cases worth following will likely be tried in 2023 and depending how they are resolved, could lay the groundwork for what a potential second wave of COI litigation could mean for the life settlement industry.
In the closely watched AXA Equitable Life Insurance Co. case, AXA Equitable’s motions for summary judgment were largely denied in March 2022 by Judge Jesse E. Furman of the U.S. District Court for the Southern District of New York in Manhattan. Plaintiffs The Brach Family Foundation Inc., et al. has alleged breach of contract when AXA Equitable raised the cost-of-insurance rate yet only applied it to a subset of the class that held AUL II policies issued to people at least 70 years old.
The plaintiffs also allege that AXA Equitable issued policy illustrations that were false or misleading in part because the illustrations failed to disclose the likelihood of a future increase in COI based on AXA Equitable’s mortality experience.
In its motion for summary judgement, AXA Equitable said it presented the proposed COI adjustment to its primary regulator, the New York Department of Financial Services (DFS). After completing its review, DFS confirmed its view in writing that the COI adjustment was “unobjectionable” and “justified.”
After receiving that “no objection” letter, AXA Equitable announced the COI adjustment, which became effective in March 2016.
“The vast majority (roughly 70%, and likely more) of the roughly 1,600 policies it applied to are held by sophisticated investors such as plaintiff Brach Family Foundation, Inc., who bought the policies from others in the secondary market and have no familial relationship with the insureds,” according to AXA Equitable’s motion. “These class members invested to speculate on the lives of strangers,”
In a recent ruling on the case, Judge Furman said the parties should try to settle the case “without the need for an expensive and risky trial.”
AXA Equitable didn’t respond to a request for comment from Life Risk News in time for publication.
A second case on the life settlement industry radar is VICOF II Trust; VIDA Longevity Fund, LP; et al. vs. John Hancock Life Insurance Company of New York, also filed in the Southern District of New York. The plaintiffs allege unlawful increasing of the COI on a targeted group of their in-force universal life insurance policies owned by the plaintiffs, including certain Performance UL and Performance UL Core policies.
According to the lawsuit, “while Defendants have not disclosed the criteria used to define this targeted group, it appears to be comprised of disproportionate numbers of investor-owned policies and policies originally issued to older-aged insureds. By raising the cost of insurance rates without a proper basis and, on information and belief, only on the discriminated group, defendants have breached the terms of the Performance Policies.”
The plaintiffs also alleged that John Hancock designed and marketed its policies to stress lower-than-market premiums, particularly in older age groups, resulting in the lowest rates in the industry.
John Hancock had selected 1,500 policies for premium increases and varied the increases according to issue age of beneficiaries, according to the filing. No rate increases were assigned to policies with issue ages of 60 or below, or if the proposed increase did not equal or exceed 5 percent. This left 1,500 policies sold to issue ages greater than 60 and, on these, COI rate increases were imposed ranging from 5 to 75 percent, with an average of 32 percent – the older the age bracket, the higher the rate increase. In addition, policies with higher issue ages received higher average rate increases.
The policies gave John Hancock a limited right to adjust and increase the monthly premiums by changing COI rates according to defined factors: John Hancock’s future expectations of persistency, or the likelihood that a policyholder will hold onto the policy until maturity (death) rather than allowing the policy to lapse, mortality, expense and reinsurance costs, and future tax, reserve and capital requirements, and only if John Hancock imposed the increases on a uniform basis and without unfair discrimination as to a class of insureds.
In the latest filing, John Hancock requested summary judgment, claiming that the premium increases are consistent with the policies. The plaintiffs claimed the contrary and Senior U.S. District Judge Alvin K. Hellerstein held that the disputes raise genuine issues of material facts, rejecting the request for summary judgment. Judge Hellerstein set a March 2023 trial date for VICOF II Trust; VIDA Longevity Fund, LP; et al. vs. John Hancock.
“These COI cases are extremely important to the market, as the increases greatly impact investors’ returns,” said Jule Rousseau, Partner at ArentFox Schiff in New York. “I have encouraged the market to fight all increases and am encouraged that the market has taken a strong fight in both the AXA and Hancock cases. This sends a message to other carriers that they should expect a serious fight if they too try to impact the market with increases.”
A spokesperson for John Hancock wrote in an emailed statement to Life Risk News that it doesn’t comment on ongoing litigation matters.