Thursday, January 24, 2008

Who Decides?

Prof. Fershee,

In response to your comment on my previous post, I absolutely hear your concern, and I share it. That is the critical balance that we must decide going forward, is an interest in mortality something that should be salable in the market, or is a "death bond" more like human organs, where for the sake of policy, we simply do not want to allow them to be sold. (For a fun read see Elisabeth Landes & Richard Posner, The Economics of the Baby Shortage, 7 J. LEGAL STUD. 323 (1978).)

Anonymous makes a great point, just pick up Dukeminier, et al. on Wills, Trusts and Estates, your family members are much more likely to "do you in" than an investment banker on Wall Street. But setting the statistics aside, the real issue is whether or not it should be the government's role to tell you who to trust.

Here's another piece to consider, there is a split among the states on the issue of whether you can sell the contract rights to the death benefit on the life policy that you own on the life of someone else. For example, I can take out a life insurance policy on my husband, because I have an insurable interest in his life. However, not all states think I should be able to sell my interest in *his life* to a third party without his consent, though, amazingly, some do.

Perhaps you would prefer the approach that requires the insured (not necessarily the policy owner) to consent to have the interest in his life sold to a third party, and then again if that interest was securitized. However, now we seem to be putting restraints on alienation that are not only potentially costly to enforce, but which may be difficult to factor into pricing. If consent is required, then the investor is actually purchasing an option rather than a pure asset.

My feeling is that life settlements and securitized pools of them, should be allowed. As long as the parties involved understand what they are doing, the practice will bring an increase in competition to a market that has unduly favored insurers. With a life settlement, consumers have another option with which to derive value from their assets. On the other hand, the corollary to an increase in life settlements is a decrease in policy lapse. Since lapse is figured into premium structures for insurance rates, insurers may have to increase premiums in order to account for this change in their expected cash flows (several already have). With an increase in premiums, it becomes more costly to procure insurance, which may dissuade a would-be insured from taking out insurance in the first place. As we still favor insurance from a policy perspective, this may be another reason to restrict life settlements.

How best to restrict the market place is not a question I am qualified to answer. So if anyone has ideas, please share. It is a fascinating web of issues, though, and something worth having on our radar.


Marie T. Reilly said...

Ok-- Here's an offer: I'll buy a cup of coffee for the PSULaw student who is first to e-mail me with the correct name for the heavily bearded dude playing the looking backward Janus in the image for this post. Kelly, you are disqualified. Hint-- I have no idea who it is.

Marie T. Reilly said...

In the words of Dodds to Dickinson (or is it the other way 'round)-- you snooze you lose. The winner of the cup o joe is Alison Kilmartin who within 10 minutes identified Dr. Facial Hair as the incomparable Karl Marx.

Kelly has suggested offline that perhaps I've sublimated Marx's countenance perhaps because of some childhood trauma (Econ 101?). Not so. I just didn't recognize the guy with a racoon on his face.

So, thanks for playing. You'll just have to be a little quicker if you want to beat Ms. Kilmartin in a free coffee contest.

Josh Fershee said...

Whew – for a second I thought that was supposed to be me (or Elisabeth Landes).

My main issue here is whether the right considerations are being made with regard to “death bonds.” That is, we have a codified policy (for right or wrong) against allowing random third parties to buy insurance on people they don’t know. So, are we sure that pooling interests, doesn’t raise the likelihood of nefarious actions against large groups of individuals?

Maybe we are, or maybe we think it is remote enough that the potential economic benefit outweighs the risk. And it maybe it is worth it. But if the subprime mortgage mess has taught us anything, it is that the risks, financial and otherwise, of new kinds of security pools can be extremely hard to predict. If nothing else, we should proceed cautiously. A point, I suppose, you already made, far more eloquently than I.

Kelly J. Bozanic said...

That is the trouble. How can we know that we are considering everything necessary to make informed policy decisions? For my part, I have come to appreciate the complexities and far-reaching effects this issue is generating. We are imperfect people, and we lack the ability to fully and accurately forecast into the future what impact our decisions will have on others. According to an individual I spoke with while doing my research, life settlements can be (and perhaps have been) used as an elaborate money laundering tool; they are not without their share of scandal, but I still believe that with appropriate oversight and consumer education, they can be a positive financial option in the economy.

From my perspective (18 months of legal education, only basic understanding of financial concepts), almost any financial tool has the capacity to be abused. Just because something can be used for nefarious purposes, doesn't mean that we should disallow its use altogether - even if life is at stake. (Guns, anyone?) Effective oversight of the various levels of these transactions is clearly necessary, whose burden that is to bear has yet to be determined.

Anonymous said...

I haven't seen any life settlement that didn't require the consent of the insured.

Kelly J. Bozanic said...

Thank you, anonymous. Perhaps I misspoke. It is my understanding that some states allow a life insurance policy to be taken out on the life of another, without their consent, so long as the individual seeking the policy has insurable interest. Compare Ellison v. Straw, 92 N.W. 1094, 1097 (Wis. 1902)(ruling policies obtained without consent are valid as long as there is insurable interest); Cook v. Bankers Life & Cas. Co., 406 S.E.2d 848, 851 (N.C. 1991) (same); with Ramey v. Carolina Life Ins. Co., 135 S.E.2d 362, 365 (S.C. 1964) (holding policies obtained without consent of insured are void as contrary to public policy).

I was extending this, perhaps inappropriately, to life settlements. It is harder for me to imagine the procuring of insurance without consent (in light of the required attending physician's statement), than to imagine the sale of the contract rights to death benefit without consent. But, I am glad to know that consent is always required - it should be! Thank you for pointing this out.