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13 November 2012

Regulation can be a great market driver; will US see TEP-style wave in life settlement fund growth?

Ioan Roberts FinalBy Ioan Roberts; Life Settlements Operations Manager, SL Investment Management

It is a given that world financial markets are greatly influenced by what happens across the pond; the life settlements arena is no exception.  One positive effect that SL believes is taking place in this bourgeoning asset class is one similar to that seen in the TEP industry whenUKlife insurance providers were forced to inform consumers about the secondary market. Regulation can be a great driving force and SL predicts it can drive the supply of life settlements following adoption of similar laws in the States.

The US National Conference Of Insurance Legislators (NCOIL) adopted legislation requiring life insurance companies to inform consumers of the alternatives to lapsing or surrendering a life policy and this model has now been implemented in a number of US States.

According to a survey by the US Government and Accountability Office, consumers who chose to sell their policy in the secondary market received, on average,seven times morethan if they had chosen to surrender the policy back to the insurer for the policy's cash surrender value.

For older American citizens who may be looking to boost retirement coffers or pay for large medical bills or ongoing care costs, this makes selling unwanted life policies a highly attractive prospect, almost a no-brainer.

Furthermore, a recent survey by industry commentators Dealflow, revealed that $5.04bn face value worth of life policies were traded in the secondary market in the US in 2011 - up 18.5% on 2010.

SL predicts the trend will continue as the NCOIL model ripples from state to state and could, over time lead to an increase in policy supply of up to 40% - a similar impact to that witnessed in the UK following the introduction of disclosure requirements by the FSA in 2002.

In turn, this is great news for investors.  More policies entering the secondary market in the US means Life Settlement managers will have greater choice in terms of the quality and price of policies they wish to buy for their portfolios. This is continuing good news for the sophisticated, institutional investors that the asset class is attracting in these turbulent times.