Academic journal article Risk Management and Insurance Review

The Secondary Market for Life Insurance in the United Kingdom, Germany, and the United States: Comparison and Overview

Academic journal article Risk Management and Insurance Review

The Secondary Market for Life Insurance in the United Kingdom, Germany, and the United States: Comparison and Overview

Article excerpt


In this article, we identify key characteristics and implications of the secondary market for life insurance. We examine the oldest secondary market, which is the market in the United Kingdom, the relatively young market in Germany, and the controversial U.S. market. We summarize the available data to describe the current market situation and market potential, which strongly depend on developments in the primary markets and capital markets, as well as on regulatory and legal aspects. Next, we discuss benefits and risks associated with a secondary market, which depend on each market's unique features. The three markets considered in this article are fundamentally different, and the comparative assessment is intended to offer insight into their functioning and key factors.


In the secondary market for life insurance, policies are purchased by life settlement providers, market makers, or auctioneers, and are then optionally placed in funds (trusts) for life settlement securitization or kept in the buyer's own books. The payment to the selling policyholder is above the surrender value offered by the primary insurer. The investor continues to pay premiums until the contract matures due to death or reaching a fixed term and then receives the contract's payoff. The benefits and detriments of secondary market activities are controversial and, additionally, they depend on the characteristics of the respective market. In this article, we contribute to the literature by providing a comparative and comprehensive study of the UK, the German, and the U.S. life settlement market. We identify key characteristics, market situation, and market potential. Furthermore, we discuss implications as well as associated benefits and risks, all of which depend on the marketplace.

A secondary market for life insurance cannot emerge in every country as it - along with legal and other factors - requires, at the least, a sufficient number of target policies in the primary market. Hence, secondary markets exist in the larger worldwide life insurance markets, such as the United States (ranking first in 2006 in premium volume),1 the United Kingdom (ranking third), and Germany (ranking fifth). Japan (ranking second) has recently become the target of life settlement firms, but the market in that country faces legal obstacles2 similar to the French market (ranking fourth). Hence, our analysis focuses on the well-developed markets in the United States, the United Kingdom, and Germany.

The specific characteristics of the secondary market differ substantially for each country. An important aspect concerns the type of target policy. In the U.S. senior life settlement market, for instance, life insurance policies of senior citizens above age 65 with belowaverage life expectancy are traded.3 In the United Kingdom and Germany, target policies are mainly limited to with-profits and participating endowment contracts with fixed time to maturity.4 Attitude toward the secondary market among the three countries is also diverse. In the United Kingdom, the secondary market is firmly established and broadly accepted, being regulated by the Financial Services Authority (FSA). The outlook for the German secondary market is cautious since current tax advantages will disappear after January 2009. In the United States, the considerable volume and predicted growth of the life settlement market has aroused both concern and enthusiasm. In September 2007, for instance, Fitch Ratings published an article about the potential risks accompanying the current "gold rush atmosphere" in the secondary market.

The emergence of secondary markets for life insurance is an issue of interest to both practitioners and academics, but the focus of the literature so far has been mainly restricted to the U.S. market. Articles often originate from industry providers or practitioners. Focusing on the U.S. market, Doherty and Singer (2002) examine the benefits and welfare gains induced by the life settlement market from the policyholder's perspective. …

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