Recent Developments in the US Life Settlement Market and the Impact on Longevity Trading

Securities and Exchange Commission Life Settlements Task Force Report and Government Accountability Office Report on Life Insurance Settlements (July 2010) A decade of growth. Substantial consumer benefits. Proliferation of laws and regulation. Strong consumer protections. No negative recommendations.

Life insurance has become in our days one of the best recognized forms of investment and self-compelled saving. So far as reasonable safety permits, it is desirable to give to life policies the ordinary characteristics of property... To deny the right to sell except to persons having such an [insurable] interest is to diminish appreciably the value of the contract in the owner's hands. -- Grigsby v. Russell, 222 U.S. 149 (1911) Underlying Principle of US Life Insurance Policies: Property Rights

Government Accountability Office Report (July 2010) Growth of the Life Settlement Market YEARTOTAL FACE AMOUNT SOLD 1998$200 million 2006$5.5 billion 2008$12.95 billion 2009$7.01 billion

Government Accountability Office Report (July 2010) Life Settlements: A Tremendous Value to Consumers In just four years ( ) policyowners received $5.62 billion above cash surrender value, an average of approximately 11 times more than cash surrender value.

Government Accountability Office Report (July 2010) State of Life Settlement Regulation According to GAO, 38 states regulate life settlements (2/2010). As of TODAY, 40 states regulate life settlements, representing 86 percent of the US population. Major states regulate life settlements: NY, CA, IL, FL (with active legislation in MA and ME).

Government Accountability Office Report (July 2010) Transparency All states regulating life settlements require that policyowners receive substantial consumer disclosures, including compensation to brokers, offers and counteroffers, alternatives to settlements, tax consequences and other disclosures. Since 2007, every state law has required compensation disclosure. 34 of 40 state laws require compensation disclosure. Average compensation was 2.5 percent of the face amount of the policy (and 11.9 percent of the gross offer) and decreased as a percent of face/offer every year.

Government Accountability Office Report (July 2010) Accountability Reports of consumer complaints about life settlements have been limited in number. Only 6 of 33 states reported any consumer complaints about life settlements from 2007 to 2009.

Government Accountability Office Report (July 2010) Conclusion Congress may wish to consider taking steps to help ensure that policyowners involved in life settlement transactions are provided a consistent and minimum level of protection.

SEC Life Settlements Task Force Staff Report (July 2010) Five Recommendations 1.CONSIDER recommending to Congress that it amend the definition of security under the Federal Securities Laws to include life settlements. 2.MONITOR that legal standards of conduct are being met by brokers and providers. 3.MONITOR the development of a life settlement securitization market. 4.ENCOURAGE Congress and state legislators to consider more significant and consistent regulation of life expectancy underwriters. 5.Issue an INVESTOR BULLETIN regarding investments in life settlements.

SEC Life Settlements Task Force Report (July 2010) Securities and Insurance Law 48 of 50 states regulate investments in life settlements as a security. 45 states have adopted some form of legislation relating to life settlements under state insurance laws (includes both life settlements and viatical settlements). SEC, FINRA and state securities regulators have successfully acted against fraudulent investment schemes. Federal Securities Law Enforcement: Life Partners (1996) to Mutual Benefits (2006).

SEC Life Settlements Task Force Report (July 2010) Effect of Life Settlements on Life Insurers Impact of life settlements on life insurance companies likely to be small. Industry observers have predicted that life settlements will have an insignificant impact on the insurance industry in the aggregate, given the very small percentage of in-force policies that have been settled. Only about 1 percent of life policies have been settled. (Reinsurance News, February 2010). [A] life settlement transaction generally has minimal or no impact on the anticipated profitability of a life insurance contract.

SEC Life Settlements Task Force Report (July 2010) Life Settlement Securitization No securitizations of life settlements registered with the SEC to date. SEC aware of very few privately offered, rated life settlement securitizations. Increase in securitization of life settlements is unlikely in the near future.

SEC Life Settlements Task Force Report (July 2010) Amending the Definition of Security: Conflicting, Unprecedented and Untenable The Task Force recommends that the Commissioner consider recommending to Congress that it amend the definition of security … to include life settlements. [T]he Task Force recommends that any amendment of the definition of security specifically exclude from the federal securities laws the sale of the policy by the insured or original policyowner as we do not believe the entire statutory and regulatory framework should apply to an individual who decides to settle his life insurance policy (including variable life policies).

SEC Life Settlements Task Force Report (July 2010) Amending the Definition of Security: Conflicting, Unprecedented and Untenable cont. However, the Task Force does believe that investors seeking to invest in life settlements and policyowners seeking to settle their life insurance policies would benefit by having all producers, settlement brokers and providers, including those producers and settlement brokers representing the insured or policyowner, regulated under the federal securities laws.

SEC Life Settlements Task Force Report (July 2010) Amending the Definition of Security: UNLIKELY SEC Report offers NO evidence of harm to sellers. Contradicts the GAO findings that sellers of policies are well-protected and receive substantial consumer disclosures through state insurance laws and that there are relatively few consumer complaints. Conflicts with 40 state insurance and 48 state securities laws.

SEC Life Settlements Task Force Report (July 2010) Amending the Definition of Security: UNLIKELY cont. SECs effort to define fixed indexed annuities as securities was outlawed by Congress in the Frank-Dodd Wall Street Reform Act, which expressly provides that the regulation of indexed annuities remain under state insurance law. Insurance industry – carriers and producers – would likely oppose similar encroachment by SEC.