Saw this story on last night's broadcast.
The Business of Life Insurance: Betting on Your Own Mortality
Wall Street Wants to Securitize Life Insurance and Some See Another Debacle in the Offing
by Bill Weir
Oct. 5, 2009—
After Dr. Eddie Powell lost both his legs to a hospital infection, he desperately needed financial help to support his practice and three children in medical school. So the 61-year-old did what more and more cash-strapped Baby Boomers are doing these days: He sold his life insurance. "For close to a million dollars of insurance, I got a hundred and some thousand dollars," Powell said.
Coventry, a life settlement company, took Powell's policies, bundled them with others and sold them to banks or hedge funds as investments. Since they pay the premium every month, the sooner he dies the more money they will make. And now, Wall Street wants in on the action and the life settlement industry welcomes the potential spike in business.
"The 'ick' factor is there and we're certainly aware of it," said Russell Dorsett, president of the Life Insurance Settlement Association. "The secondary market simply lets individuals bet on their own mortality. So, say that I am going to live longer than you think I am. I will take the money now rather than having to wait to die in order to get it. It's no different than the life insurance business itself. Basically mortality, morbidity is a multitrillion dollar market."
For critics, the move to securitize the life insurance industry harkens back to the early days of the subprime mortgage boom. That crisis began when banks gave loans to people who couldn't afford them, but it got much worse when Wall Street used exotic forms of investments (called collateralized debt obligations) to bet that those loans would go bad.
With Wall Street's trillions in play, banks had more incentive to issue more subprime loans. When those loans went bad, the investors got rich but the housing market -- and the entire economy -- nearly collapsed.
If Wall Street is allowed to bet on the early death of seniors or the terminally ill, some worry it could not only strain the insurance industry, but also create a market for shady brokers to prey on the sick and elderly while adversely affecting the health policy of the nation.
"People who have bets on early death will find themselves lobbying against effective health care," said Michael Greenberger, a University of Maryland law professor and former director with the Commodity Futures Trading Commission. "There's no two ways about it, this is an accident waiting to happen in terms of investment&. It's setting up the same wild financial infrastructure that turns out to be nothing more than a casino, unrelated to the underlying transaction."
While a life settlement spokesman acknowledges that around $40 billion worth of policies have been sold in the past five years, he says that number is a small percentage of the multi-trillion dollar industry and could never pose a risk to the system. "We estimate that maybe 1 or 2 percent of policies might qualify for a life settlement at some point," said Dorsett. "While that number will grow due to demographics it's still relatively small compared to the economy as a whole."
As for Dr. Powell, he says he regrets his decision to sell his life insurance for pennies on the dollar. "I made a stupid mistake," he said. Every few months, a representative from Coventry calls to see if he is still breathing. He plans to keep answering for a long time. "My grandma lived to be 115&you've got a long time before Eddie Powell dies," he said.
But if Coventry gets its way, there will soon be plenty of investors on Wall Street hoping, and betting, he is wrong.
Copyright © 2009 ABC News Internet Ventures
Showing posts with label Insurance. Show all posts
Showing posts with label Insurance. Show all posts
Tuesday, October 6, 2009
Thursday, April 16, 2009
Regulate Me, Please
April 16, 2009 - Op-Ed Contributor
Regulate Me, Please
By Tom Wilson
THERE are plenty of people singling out causes for the collapse of the financial markets, and conveniently, the source of the problem is usually someone else. But accountability lies with all of us — the insurance industry, regulators, banks and credit rating agencies. The insurance companies that wrote credit default swaps were happy not to be regulated. Insurance regulators didn’t expand their oversight to ensure the solvency of these companies. Banking regulators, banks and credit rating agencies did not properly assess the strength of issuers and readily accepted these complex derivatives.
My company, Allstate, serves more than 17 million American households. While we played only a small role in unregulated insurance markets, we have a duty to help stabilize the financial system. It was, after all, an insurance product that contributed to the risk that almost brought down the global economy.
Insurance is defined as coverage by contract in which one party agrees to indemnify or reimburse another for loss. The credit default swaps written by American International Group are clearly insurance since they are a contractual obligation by A.I.G. to pay should there be a default on a security. It should be no surprise that a big insurer like A.I.G. would be a major issuer of credit default swaps. What is surprising is the claim that insurance did not contribute to the recent market failures, and therefore insurers don’t need to consider how to prevent them from happening again.
Unlike banks or investment houses, insurance companies are not regulated by the federal government. Instead, they are regulated by individual states, which lack the expertise to properly oversee rapid innovation or systemic risks. Business leaders must work with the government to create a new regulatory structure. All companies that create risk for the financial markets need to be in “the pool” of federal regulation, including companies like Allstate. A good start would be for Congress to eliminate the hodgepodge of state regulatory systems by establishing a federal regulator for national insurance companies.
Such a sophisticated federal insurance regulator would oversee the financial stability of large companies. We should also consider expanding private insurance to protect personal savings from systemic risks. And we need to establish a federal agency that would be empowered to deal with any large failing financial institutions, outside of bankruptcy. We must all accept responsibility for our current situation, and work together to broaden the scope of federal regulation to protect both consumers and financial markets.
Business and government leaders must avoid the trap of diminished expectations and continue to demand the best of ourselves and our fellow Americans. Millions of hard-working families are counting on us to get this right.
Tom Wilson is the chief executive of Allstate.
Regulate Me, Please
By Tom Wilson
THERE are plenty of people singling out causes for the collapse of the financial markets, and conveniently, the source of the problem is usually someone else. But accountability lies with all of us — the insurance industry, regulators, banks and credit rating agencies. The insurance companies that wrote credit default swaps were happy not to be regulated. Insurance regulators didn’t expand their oversight to ensure the solvency of these companies. Banking regulators, banks and credit rating agencies did not properly assess the strength of issuers and readily accepted these complex derivatives.
My company, Allstate, serves more than 17 million American households. While we played only a small role in unregulated insurance markets, we have a duty to help stabilize the financial system. It was, after all, an insurance product that contributed to the risk that almost brought down the global economy.
Insurance is defined as coverage by contract in which one party agrees to indemnify or reimburse another for loss. The credit default swaps written by American International Group are clearly insurance since they are a contractual obligation by A.I.G. to pay should there be a default on a security. It should be no surprise that a big insurer like A.I.G. would be a major issuer of credit default swaps. What is surprising is the claim that insurance did not contribute to the recent market failures, and therefore insurers don’t need to consider how to prevent them from happening again.
Unlike banks or investment houses, insurance companies are not regulated by the federal government. Instead, they are regulated by individual states, which lack the expertise to properly oversee rapid innovation or systemic risks. Business leaders must work with the government to create a new regulatory structure. All companies that create risk for the financial markets need to be in “the pool” of federal regulation, including companies like Allstate. A good start would be for Congress to eliminate the hodgepodge of state regulatory systems by establishing a federal regulator for national insurance companies.
Such a sophisticated federal insurance regulator would oversee the financial stability of large companies. We should also consider expanding private insurance to protect personal savings from systemic risks. And we need to establish a federal agency that would be empowered to deal with any large failing financial institutions, outside of bankruptcy. We must all accept responsibility for our current situation, and work together to broaden the scope of federal regulation to protect both consumers and financial markets.
Business and government leaders must avoid the trap of diminished expectations and continue to demand the best of ourselves and our fellow Americans. Millions of hard-working families are counting on us to get this right.
Tom Wilson is the chief executive of Allstate.
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