New Longevity Risk Underwriting Tools Improve the Stability of the Life Settlement Market

The Role of Longevity Risk in Life Insurance

The pricing of life insurance products is tied to the forecast of an insured’s life expectancy—what insurance experts call “longevity risk"—and relies on an estimate of the insured’s probable lifespan that is generated by the insurance company’s underwriting models. This same basic principle of longevity risk is also at the heart of how life insurance policies are bought and sold on the secondary market through life settlements. The good news for financial advisors and their clients is that improvements in life expectancy underwriting and technology are helping to make this secondary market even safer and more efficient for anyone who wants to sell their life insurance policy.

Emergence of New Underwriting Tools

A McKinsey & Company white paper, “Rewriting the Rules: Digital and AI-Powered Underwriting in Life Insurance,” examines the life insurance underwriting models that have been relied upon for years and makes the case that these processes are in need of fundamental transformation.

That transformation is being driven by the emergence of new technologies and innovative tools that are improving the efficiency and accuracy of longevity underwriting.

“Some companies have taken a clean-sheet approach to simplify risk assessment, incorporate new data sources, and increase deployment of AI-driven techniques,” explains the McKinsey researchers. “This has led to much simpler application forms, the removal of invasive requirements for more of the population, and pricing differentials that are lower than those of fully underwritten products.”

Participants in the life settlement industry have taken notice of these new technology-powered approaches to longevity underwriting and the potential impact on the secondary market as well.

“The traditional life insurance underwriting approach sees an agent speaking to a customer, who then fills out an application form,” reports Life Risk News. “This is then manually underwritten, a process that might involve getting a fluid sample from the policyholder and maybe some extra medical records. The insurtech sector is driving significant change in this approach, fueled by an explosion in the availability of data, the quality of data, and the technology available to analyze it.”

For example, longevity underwriters are now using AI-based “aging clocks," which are better predictors of mortality than chronological age, in their actuarial tables as a way to better assess risks.

“As better predictors of chronological and biological age enter the market, it is important for companies to fully take advantage of (these) applications... to make better decisions regarding risk assessment,” reports Forbes.

How New Tools Are Improving the Life Settlement Market

The emergence of these new technologies and tools will improve the accuracy and transparency of longevity risk underwriting. This is an important development for the long-term stability of the life settlement market.

In order for any market to be efficient and sustainable, both sides of the transaction—buyers and sellers — must benefit in tangible ways. In the case of the life settlement market, the key ingredient to this formula is for life expectancy underwriting to be accurate and consistent.

For example, if life expectancies are too high, the policy will be priced unfairly for the seller, and consumers will not receive fair economic value for their policies. If life expectancies are too low, investors will end up overpaying for the policies and underperforming on the returns they require in order to continue investing in these assets. Neither of these scenarios are in the long-term interests of the life settlement market.

Fortunately for all participants in the life settlement industry, including financial advisors and their clients, there have been tremendous strides made in recent years with respect to the reliability of life expectancy underwriting. This not only includes the application of new technology-enabled processes but also by leveraging new scientific learnings and applying new data discoveries. Guided by these discoveries and tech innovations, life expectancy forecasts will continue to improve.

The Key is Independent Life Expectancy Reports

There is an important caveat to all of this good news about improvements in longevity risk underwriting for participants in the life settlement market. It is crucial for advisors to work with a licensed life settlement broker who will obtain an independent life expectancy report in order to negotiate the best possible deal for your client.

Incredibly, many financial advisors — and even some third-party service providers in this space — will simply rely on the life expectancy estimates provided by a potential buyer to set the parameters for the negotiation on the fair market value of a life insurance policy on the secondary market. This would be like a homeowner just asking a prospective buyer to write up an appraisal of their house and establish that as the asking price.

The only way to make sure that your client is obtaining the true fair market value for a life insurance policy is to work with a licensed and experienced life settlement broker who has a fiduciary duty to represent the consumer’s best interests. This includes obtaining independent life expectancy reports to guide the negotiations with prospective buyers.

Contact Welcome Funds for Expert Guidance

For more information on how to maximize the benefits of life settlements, please visit www.welcomefunds.com or call 877.227.4484.