The life settlement is a legal, regulated process for liquidating life insurance. Unfortunately, the regulations in place don't fully address the culture of mistrust in the industry. That culture is an outcome of the traditional process: Life settlement cases have historically been managed behind the scenes, with each stakeholder having access to only some of the case details. That veiled environment allows providers, agents, advisers, investors, brokers and policyholders to work at cross purposes.
Complicating matters, the amount of funds available to buy policies has exploded in recent years. As more money circulates in the industry, dishonesty and deception remain key issues that ultimately work against all stakeholders.
Harbor Life Brokerage set out to move the industry past those issues with technology -- specifically, a life settlement exchange that ensures transparency and ethical business practices.
Underlying mistrust and lack of transparency
The traditional life settlement auction process has pockets of secrecy. Insureds, agents, advisers, life settlement brokers, life settlement providers and life settlement funds rarely have access to the same set of information. Brokers typically act as gatekeepers, with the freedom to share or withhold details as they see fit. They naturally create a lack of transparency and fosters mistrust.
Some of that mistrust is warranted. Unethical brokers will award cases based on relationship rather than bid size. That's a clear disservice to the insured, who assumes the broker is working to negotiate the highest selling price possible. In these cases, the broker must intentionally limit the auction information provided back to the insured. The insured certainly won't see the highest bid -- and also may not know how the winning offer was calculated or where it came from.
Fortunately, these problems are solvable with technology. The Harbor Life online auction platform creates transparency by giving all stakeholders access to the same information. With case details and bids accessible electronically, whoever submits the highest bid wins the case, period. There is simply no room to make a backdoor deal, which ensures a fair process for everyone involved.
Poor communication
Poor communication, whether intentional or by accident, worsens the lack of transparency in the traditional life settlement process. Layers of hidden fees charged by providers or brokers cut into the insured's proceeds -- often without the insured's knowledge.
As an example, a broker might deliver a net offer to the insured, with no breakdown of the gross selling price and the broker's commission. As well, providers may put in offers net of their fee, essentially hiding those fees from funders.
Policy metrics can be another area of confusion. Actuarial firms, responsible for valuation, may be inconsistent on key metrics, such as life expectancy. That misalignment of data works against providers who are trying to put their best offer forward to win the deal.
Again, technology can solve for missing or inconsistent data. The Harbor Life Exchange states valuation metrics up-front so all parties are working from the same set of numbers. The exchange also requires families to sign off on commissions for every transaction -- ensuring full transparency into the fees paid out of sale proceeds.
The exchange also invites providers to specify their fees. That way, life settlement funds know what the provider is making on every deal.
See also: Making Life Insurance Personal
Lack of free market competition
Ultimately, the closed nature of the traditional life settlement process limits free market competition. And any factor limiting open competition will hold the entire industry back from growth.
Transparency inspires confidence in life settlement transactions. And confidence creates growth. Confident buyers submit higher bids -- because they're more comfortable with policy details and valuation metrics. Confident agents and advisers refer more cases, creating more opportunities for buyers. And confident insureds have a positive, profitable experience they can share with friends and family.
The Harbor Life exchange promotes this confidence dynamic by encouraging as many providers as possible to compete openly on every case.
Reinventing the life settlement market
The Harbor Life Brokerage exchange streamlines life settlement transactions for agents and buyers. When agents submit cases, Harbor Life orders current records and compiles the case information. Agents can then list those cases on the exchange with a reserve price -- that is, the minimum bid the insured will consider.
More than a dozen licensed providers are invited to view all listed policies on the exchange. Those providers can filter listings by policy type and insured demographics, including health status, state of residence, gender and life expectancy. Diving into each listing, providers will see a summary of key metrics for each case that's easy to analyze and compare.
See also: Beware the Grey Swan
All stakeholders have a transparent view of bids, fees, case details and valuation metrics. It's a form of forced transparency to combat communication shortfalls that have historically plagued the industry. This transparency prevents relationship-based decisions and gives all stakeholders confidence that the buying process is fair.
Life settlements are growing in popularity, but the industry needs innovation to move into the mainstream. Technology that fosters transparency and competition is a big step in the right direction.
