Life Risk Solutions
RCP Solutions for Unusual Life Related Risks
As the life insurance industry develops increasingly complex and unique transactions that involve for example premium financing techniques, portfolio securitizations and life settlement transactions, RCP fills a void by structuring unique risk transfer solutions that enhance profitability. By eliminating risks associated with complex life transactions, RCP has been instrumental in enabling clients to better understand the critical issues and the sources of both risks and profits. By removing risks that would have otherwise been retained at a higher cost by life broker/agents, life insurers/reinsures and or life insurance investors (hedge funds, venture capital, life settlements, investment banks), RCP solutions have “enabled” these parties to “lock in” profits, eliminate uncertainty and mitigate transactional risks cost-effectively.
Unique RCP solutions have resolved unconventional issues faced by our clients who include Life Insurers, Life Reinsurers, brokers of large life policies in the financial planning community and life settlement industry members.
Sample RCP Solutions Include:
Contestability Insurance
Description – A life carrier can choose to contest the validity of a life policy within the first two years and cancel the policy or refuse to pay any death benefit claim if the underlying insured commits suicide or there is material misrepresentation on the application. If the contestation is successful, the life carrier would repay any premiums paid and cancel the policy. If this occurs, the owner of the policy would be out of pocket any interest and costs associated with procuring the policy. RCP has developed a contestability policy with an AA - rated property / casualty insurance company that would indemnify the policy owner if the life insurance carrier successfully contests.
Market Significance – RCP's Contestability Insurance Program creates liquidity for life policy investors interested in either the purchase or sale of newly incepted life insurance policies.Life Settlement Due Diligence Practice
Description - Assistance in the due diligence of a life settlement portfolio. RCP provides the services below in addition to the pricing analysis, comprehensive document checklist, and an investment memo for each policy in a given portfolio.
Chain of Title Review
Closing Documentation
Fraud Review - insurable interest, STOLI, medical and policy issuance fraud
Valuation of the individual policies
Validation of Premium Streams
State Regulatory Reviews
Data Consistency
Contestability Review
Risk Analysis to include tail and maturity risk
Clearing potential Third Party Liens or Issues
Comprehensive Checklist of all Documents available
Insurable Interest Insurance
Description - A life carrier can choose to rescind a policy (including refusing to pay any death benefit claim) if the original beneficiary of the policy did not have an insurable interest in the underlying insured's life at the time the policy was taken out. Unlike with contestability, life carriers can rescind for lack of insurable interest at any time in many states. If the rescission is successful, the life carrier would repay any premiums paid and cancel the policy. If this occurs, the owner of the policy would be out of pocket any interest and costs associated with procuring the policy. RCP has developed insurable interest policies with AA - rated property / casualty insurance companies that would indemnify the policy owner if the life insurance carrier successfully rescinds on insurable interest grounds.
Market Significance - RCP's Insurable Interest Insurance Program creates safety and assurance for life settlement investors.
Current Versus Guaranteed
Description – Guaranteed life products have fixed costs and other charges resulting in an annual premium to the underlying insured/structure that is guaranteed not to increase, whereas current life products can increase in price due to changing mortality experience, investment performance, taxes, admin charges, and other loads. RCP is attempting to develop a GAP property casualty program to essentially allow current product to perform as guaranteed.
Market Significance – Seeking product approval by a property/casualty carrier. If the product is approved it will significantly improve life annuity transaction economics. RCP is the only group pursuing this novel coverage.
LE Plus 1
Description – Coverage provided by a property/casualty insurer - guarantees the payment of death benefit at the anticipated life expectancy plus 1 year if the "life" is still alive. Insured has the option at a specified date in the future ("Liquidity Date"), to transfer (or assign proceeds from) the remaining life policies from the "Subject Business" to the Insurance Carrier for a claim equal to the "Limit of Liability".Claim Date - LE plus 1 yearClaim Amount - 80 to 100% of the Face Amount of the Covered Life PolicyPremium - tbd% of the face value of the Covered Life PolicyA Commitment of Coverage can be procured prior to the actual binding of coverage.The commitment is valid for 90 days and allows prospective clients the opportunity to acquire policies after receiving assurance that LE coverage is available for the aggregated portfolio.
Residual Value Insurance for life settlements
Description – A property/casualty insurance policy that establishes a minimum value for a life insurance policy two years into the future at the time of a potential sale into the secondary market. Similar to purchasing a “put” option, the insurance policy will reimburse the holder if the life policies cannot be sold for a price equal to (at a minimum) the premiums paid during the two years plus associated funding interest.
Market Significance – RCP is the only group to develop/offer this type of coverage, which will enable life settlement transaction organizers to lower their costs of capital.
Life settlement transactions that benefit charities
Description – Developed GAP coverages that mitigate risks associated with a transparent-to-all-parties transaction where an insured person provides substantial funds to their long-term charity through the purchase of high-face-value universal life insurance and the immediate sale of this insurance into the senior settlements market.
Market Significance – RCP’s GAP coverage helped mitigate risks the structure could not bear on its own.
Annuity arbitrage transactions
Description – This transaction experienced industry wide disfavor when both life carrier’s and re-insurers believed that the structure created value at their expense. RCP conducted an in-depth investigation proving to a number of life insurers/re-insurers the legitimacy of the transaction and that the value drivers were not exploitive.
Market Significance – RCP’s explanation to life re-insurers uncovered complex regulatory, tax and accounting factors that are inherent to the life insurance industry - factors that created the ‘juice” that enabled the transaction.
Missing Body Coverage
Description – Insurance that covers the risk of a difference of opinion on whether or not an underlying insured is alive or dead, such as being lost at sea. This may be relevant where, for example, a life insurance carrier refuses to pay a death benefit as the body is not available while an annuity carrier refuses to continue to pay the ongoing annuity. For certain transactions this coverage can avoid a potential liquidity mismatch
Market Significance – The program enables annuity arbitrage transactions.
Mortality-limited fixed to floating rate swap
Description – In order to finance annuity-life insurance transactions, it would be superior to have a fixed-to-floating rate swap as lenders dislike fixed-rate loans for indefinite periods. By placing a mortality hedge into the property/casualty markets, the transaction was enabled.
Market Significance – RCP’s coverage enabled bank financing for annuity-life insurance transactions. Although ultimately the client did not purchase the swap, a property/casualty carrier stands ready to provide coverage to interested RCP clientele.
Sample Research Assignments Include:
Analysis of Annuity Arbitrage Economics: On behalf of major life re-insurers, RCP was commissioned to identify the sources of economic value gained when a life policy is coupled with a life annuity. Annuity arbitrage transaction organizers, life carriers and life re-insurers were unable to quantify for themselves the sources of vig beyond mortality expectation. As a result both life carriers and life re-insurers were concerned that the gain was at their expense. RCP was able to quantify further sources of value and demonstrate that the transaction was not a zero sum situation.
Analysis of Inherent Risks Associated with Life Insurance Policies: On behalf of a major Investment Bank, RCP was commissioned to examine the terms, conditions, provisions, and economics embedded within life insurance policies which could expose life settlement investors to risks that were not previously considered. Although investors did recognize significant risks such as credit and contestability, many were not as familiar with differing policy forms, COI levels, life carrier tax status changes, and M&A knock-on effects.
Analysis of Life Settlement Industry: On behalf of a significant hedge fund, RCP was commissioned to examine the economics associated with leading life settlement transactions currently in the marketplace. RCP identified for investor consideration the key regulatory, accounting, tax, legal and industry related risks. RCP created risk transfer products that mitigate key risks enabling safer returns. Additionally, RCP developed a pricing model to help establish the value of policies to be purchased. Finally, RCP identified new sources of value in the life settlement space - developing an investment vehicle that generates significant returns while betting against the typical investment strategy deployed by most life settlement speculators.
Analysis of Risks Associated with Non-Recourse Premium Financing: On behalf of a major US bank, RCP was commissioned to examine the risks associated with non-recourse premium financing. RCP identified a comprehensive list of risks and their respective impact on potential returns. Some but not all of the risk identified included: insurable interest; liquidity risk in two years; change in view of 3rd party medical evaluators; increase in COI’s; regulatory change i.e. 10% excise tax; interest rate risk and credit risk of the life carrier. RCP developed on behalf of the US bank a Non-Recourse Premium Financing program that mitigates some of the aforementioned risks.
Analysis of Underwriting Criteria Utilized by Debunk Lloyd’s Syndicate offering LE Cover: On behalf of a major US Property Casualty carrier, RCP was commissioned to examine the factors that lead to the failure of a Lloyd’s syndicate that offered LE plus two coverage. In addition to identifying critical underwriting, actuarial and due diligence inconsistencies/errors, RCP developed sound underwriting guidelines and models needed to effectively launch a sustainable LE plus program. RCP was also able to actuarially demonstrate that current providers in the market were not a competitive threat since their published pricing/sales tactics indicated that the group was neither legitimate nor able to pay claims, in effect a ponzi scheme.
Analysis of Tax Consequences for Individuals Who Monetize Excess Insurability: On behalf of a family office, RCP was commissioned to examine the opportunities available to high net worth families who were interested in monetizing their excess insurability. The analysis included the tax implications surrounding traditional life settlement strategies, securitization techniques and structures that benefit charities. RCP aggregated the opportunities from a risk reward perspective and made recommendations that were ultimately followed.
Analysis of the Economic Value of Major Life Insurance Policy Chassis: On behalf of a major Property Casualty re-insurer, RCP was commissioned to examine the various structural forms of life insurance for the purposes of creating new risk transfer instruments that could be underwritten by a P&C re-insurer. RCP’s analysis included the possible statutory, tax, and GAAP accounting results under both reasonable and unreasonable scenarios, the likelihood of different economic results and how the volume affected the reliability of the forecasts. RCP further looked at different optional riders to the policies and how each of these would affect the risk-reward trade-off. From this research, RCP was able to determine a rubric for forecasting discretionary life carrier behaviors.
Unusual life risks can be mitigated and cost-effectively transferred. Contact RCP to discuss how we can help facilitate the successful completion of your life insurance based transaction. Our team of experts specializes in structuring innovative risk transfer instruments that address unusual life related risks.
