Brokerage firm shaking up insurance industry

The insurance industry is getting a jolt of technological savvy from a company of forward-thinking brokers who have established the first-ever online auction site focused on selling unwanted life insurance policies.

Life Settlement Insights late last month kicked off its new auction site LifeX, the first online exchange in the life insurance settlement industry. The industry is a niche of the insurance market that has grown to a nearly US$15 billion business over the past few years.

Life insurance settlement deals with insurance policies that are no longer wanted by their owners, mostly because they can no longer pay the premiums that increase as policyholders age.

Those policyholders have traditionally had two options: Stop paying premiums and walk away empty-handed or take a cash payout from the insurance company, usually a small percentage of the policy's value.

But now the life settlement industry offers the option of selling the policy to the highest bidder, typically institutional investors. The buyer pays the policyholder a fee, typically between 15 percent and 20 percent of the policy's value, takes over payment of the premium and then collects the payout when the policyholder dies.

"The returns on these policies is typically between 9 percent and 12 percent. That is why institutional buyers like them," says Jim Cavoli, CEO of Life Settlement Insights. And sellers are just as happy because they receive a higher payout than they would typically get from the insurance providers, he says,

The problem, however, is linking up the sellers and buyers and negotiating the deals. The process has been manual, labor-intensive and expensive. Deals also take weeks to transact as brokers run between buyers looking for the best deal. But Life Settlement Insights, which negotiates on the behalf of the sellers, is out to change all that and trump its competition in the process.

"Fundamentally, right now, what we want to do is make the negotiation efficient," Cavoli says. "We want to take it from three to six weeks down to 30 minutes."

Last month, the firm's first-ever auction lasted an hour, ran in real-time and included bidders from five states. He says the bidders concluded that the process could be cut to 30 minutes.

"There is no limit to the number of buyers for the online auction, whereas physical requirements limit what I can do manually," Cavoli says. "We are working 40 to 50 deals at any given time, and to do that across six to 15 buyers becomes an onerous task for our staff. And the buyers get a great deal of benefit because if you were not at the top of my Rolodex, you were not getting a call from me and you were not engaged."

Analysts say the ability to streamline the process will be key.

"If they can keep costs low enough they might get enough volume to make it worth their while, but it doesn't sound to me like something that is going to take the industry by storm," says Matt Josefowicz, manager of the insurance group at research firm Celent.

Life Settlement Insights went online with auction service provider HedgeHog, which also runs auctions for the hotel industry and healthcare. The company runs its site on Windows servers that support a Java front end for browser-based access and an Oracle back end for data storage.

"It's pretty straightforward what we do," says Jemin Patel, founder and CEO of HedgeHog. Patel says HedgeHog customized its proprietary auction application to support LifeX, including the capability to handle the large dollar amounts the auction deals with and its open-forward auction format where bids are sequentially increased until the bidding tops out.

For the first auction, Life Settlement Insights provided buyers with a few weeks of preparation time to review the policies and run their pricing analysis. Then the auction kicked off.

"As the first movers, we find a lot of people want to come to our brokerage now to sell their policies because they like the idea of getting an answer soon, and they like the idea of knowing that they are getting fair market value, which is objectively measured by the lack of further bids," Cavoli says.

Cavoli sees a day when this technology might be the standard industry wide, even perhaps spinning off a separate company that would contract with any number of brokerage firms.

"This is where we would like to see it go, but right now this is a cost-savings tool for us," he says.

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