New York Life Exec: Life Settlement Industry Should Strive for Standardization and Consumer Protections
October 31, 2013 by Angelo Lewis, Senior Associate Editor, Best's Review
NEW ORLEANS – States should work harder to institute consumer protections, standardization and methodologies when it comes to the life-settlement market, according to Scott Berlin, senior vice president at New York Life. He spoke with Best’s News Service at the American Council of Life Insurers Annual Conference in New Orleans.
Q: If you could just first of all explain to us what a Medicaid viatical settlement is. If you want to start with what is a life settlement, we’ll just break it down.
A: We’ll start with what a life settlement is. Life settlements were born out of the old viatical settlement market where there are private companies out there buying life insurance contracts from people who have impaired health because the intrinsic value of the life insurance contract is a lot greater when someone has impaired health because they are closer to death and closer to collecting on that policy, so there’s a lot of value in the contract and companies called life settlement companies are out there purchasing life insurance contracts. Viatical Medicaid life settlement is a new idea where people who are going on Medicaid sell their life insurance contracts to a viatical company with the proceeds of that settlement being used to pay for long-term care-type services to defray the cost of Medicaid.
Q: In June, Texas became the first state to adopt the Medicaid Life Settlement Law, allowing state residents to use the proceeds to pay for private long-term care expenses. I was wondering if this is just a state thing or will there be implications for future Medicaid asset valuation?
A: At the state level, what they’re attempting to do is to allow people to get value out of their life insurance contract without having to cash them in; with the proceeds being used to pay for Medicaid services. At the federal level, this will require an exemption because federal law does not recognize the Medicaid settlements as something that can be disqualified from the qualification for Medicaid.
Q: What are the risks accompanying these Medicaid viatical settlements?
A: Well, I think the risk is really inherent in the life settlement industry the way it’s constituted today. There’s very little consumer protection involved in life settlements. The way the market works today, the senior individual is required to negotiate with the life settlement company. There’s no standardization of practice and, if fact, two people who are the same age, who have the same health and the same policy can get two different offers from the same company based on how well they negotiate. So today it’s a little bit like buying a used car. You need to know how to negotiate and how far you can push the settlement company. And also there’s very little competition. There’s only one or two actively pursuing this market, so fair value economics haven’t yet kicked into this market. So it’s a little bit of buyer beware and I think that the states would do well to institute consumer protections into the process such as state filings of methodology and valuation of liabilities and things like that, similar to the way the insurance industry is regulated today.
Q: So basically the life settlement industry is not regulated like the insurance industry is regulated?
A: That’s correct. There’s not the same type of consumer protections in the settlement laws of the states. They do have certain regulations on the books but they’re not comprehensive enough.
Q: Now, Scott, in your presentation you alluded to some options beside these types of contracts if people didn’t want to go this route. The broad question is how does this growth of this industry, at least the viatical settlement industry, how does that affect life insurers in terms of their product development? As you know, there hasn’t been a great history between the two industries.
A: I don’t think that there’s a great impact any more. I would say if you went back five or 10 years, there was a situation where life insurance companies, particularly reinsurance companies, underestimated the mortality at the very advanced ages and therefore the pricing of senior life insurance contracts may have been subsidized by other areas of the business. As the life settlement industry came in and started to arbitrage that opportunity what’s happened is that the life insurance rates for seniors has gone up. Like any arbitrage opportunity that winds up getting closed. So I think that whatever was going to happen has happened already. Rates are higher and the arbitrage doesn’t exist anymore, at least not on a mass basis. But going forward I don’t think insurance companies are impacted one way or the other because we’re in the business of paying claims. That’s what we do. And whether we pay the claim to a beneficiary or we pay the claim to a life settlement company who has taken the policy over is really immaterial to the direct writer.
Q: Do you have any closing comments about the subject?
A: I think it’s a good idea to look for ways to cover and defray Medicaid costs, and certainly there are valuable contracts that are assets that people own so they should be informed on the options that they have with their policies, but it’s also very important that states take a step back and make sure that there’s adequate consumer protections in place to insure that they don’t get caught up with foul play. The way it works today is the deal that you get is very much based on how well you negotiate with the company and for the insurance industry that’s probably not an appropriate practice.
The full interview with Berlin is available at http://www.ambest.com/v.asp?v=berlin1013
(By Angelo Lewis, Senior Associate Editor, Best’s Review, Angelo.Lewis@ambest.com)
