In July last year, the Pensions Institute of the Cass Business School published Death Shall Have No Dominion: Life Settlements and the Ethics of Profiting from Mortality.
This report is interesting as the basis of the investment is protection insurance – whole of life (WOL) policies – sold before death and because it promises returns on investment of between 8%-11%. The market is currently over $18bn and was expected to grow to $160bn in the next few years but that forecast may be an underestimate as it was made before the recession.
So what is going on in this obscure part of planet insurance? Brokers are buying WOL policies from people aged over 65 with medical problems likely to result in death in three to 15 years and selling them to investment companies. In addition, offering older people with medical problems a loan to buy a WOL policy with the intention that the policy will be sold on to an investment company, which is fabulously known as ‘stranger-orientated life insurance’ or Stoli.
So what are the issues? First is the ethics of the concept – profiting from the early death of the insured population. Customers are paid money based on an estimate of when they will die – the earlier this happens the more money the investor gets because they pay fewer premiums. The remaining profits come from transaction charges. The report also shows that the majority of people (79%) who sell their policies do so for income replacement, such as paying medical bills. Medical charities and companies with strong ethical principles are likely to take a dim view on both points.
Second is fair treatment for policyholders – they need to understand that a third party will potentially gain from their death and know that they must disclose to their provider that they have bought a policy through a Stoli. As mentioned, these are mainly distress sales with unequal relationships between seller and buyer. Third, there is fair treatment of end-investors, especially where significant numbers of policies are subject to Stolis, as court cases could lead to payments to the deceased’s relatives rather than the investment fund.
Finally, there is regulation of products and sales. This varies from state to state and is nothing near as rigorous as our own on, for example, immediate needs annuities. Scandals may erupt that undermine the whole business model – potentially retrospectively.
As usual, and as we know from our cost on toxic loans, over-complex and impenetrable business that offers ‘guaranteed’ over the odds returns lends itself to manipulation and eventual crash.
Richard Walsh is managing director of SPPR Consulting
