Singer and Stallard Critique Deloitte Study on Secondary Market for Life Insurance

November 20, 2005

On November 20, 2005, Criterion President Dr. Hal J. Singer and Duke Professor Eric Stallard released a reply report to the Deloitte Consulting-University of Connecticut Actuarial Center Report (“Carriers’ Report”) on the secondary market for life insurance. The authors identify several problems with the actuarial model used by the authors, including the use of mortality tables, tax assumptions, and impairment levels. Singer and Stallard conclude that while it may be true that holding a policy until death maximizes the value of the policy at the time of death, it does not necessarily follow that such a strategy is the utility-maximizing strategy for all policyowners at any point in time before death.

The Carriers’ Report estimates that policyowners with life expectancy in excess of 24 months who sold their policy to a firm licensed as a viatical company in New York (and whose transactions were thus recorded by the New York Department of Insurance) lost $98.5 million in value during the four-year period from 2000 through 2003 (equal to $143.2 million in the alleged IEV of all policies sold less $44.7 million in LSV) or $24.6 million annually. But Singer and Stallard point out that, because a firm that is licensed as a viatical company does not generally target the same set of customers as a life settlement provider, it is not appropriate to use the ratio of LSV to cash surrender values (CSV) paid by viatical settlement companies as a proxy for the ratio of LSV to CSV paid by life settlement providers. In particular, viatical companies generally target individuals who are terminally or chronically ill and who often are in need of cash, whereas life settlement providers generally target individuals or trusts who are not terminally or chronically ill and who often have multiple policies in force. The authors also explain that comparison of LSV values to IEVs is flawed because one must assume that, contrary to historical data on lapse rates, 100 percent of the policies in the New York Department of Insurance database would have been held until death but for the life settlement transaction. Using a multiple of life settlement values to cash surrender values of 2.5, and assuming that 100 percent of those policies would have been surrendered to the issuing carrier but for the life settlement transaction, Singer and Stallard estimate that the cash surrender value associated with those policies would have been worth just $17.9 million (equal to $44.7 divided by 2.5), which implies that life settlement transactions increased consumer welfare by $26.8 million (equal to $44.7 million less $17.9 million).

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