European association says criticism of life insurance-based products 'unjustified'

The London-based European Life Settlement Association (ELSA) has called criticism of life settlements in Malta over recent days "unjustified".

The association sought to address concern expressed by the Malta Financial Services Authority and media discussion about the suitability of life insurance-based products for retail investors offered by Maltese financial intermediaries.

In a statement which was not intended as investment advice, the association said reports had suggested investors may not fully understand the nature of investing in life insurance-backed investments. Maltese investors were warned about issues relating to the liquidity of the asset, repayment of interest and capital, and any redemption charges which may apply for investors who wish to exit their investment before its maturity.

These products, known as 'life settlements', relate to unwanted life insurance policies belonging to senior US citizens. They are sold by the policy seller to a financial institution in exchange for a cash sum, and can be used to form the basis of a fund.

ELSA explained that the appeal of life settlements following the financial crisis was their lack of correlation with traditional investments. This had made life settlements attractive to retail investors looking for a steadier form of income on their capital and an alternative to equities, bond and property.

"We welcome discussion that improves understanding and transparency about investing in life settlements," ELSA retail spokesman Andrew Wilkins said.

ELSA said that in its experience, advisers and investors responded well to the diversification benefits of investing in life settlements and found the concept easy to understand.

Sale at short notice may see policies sold at a discount, but a greater degree of protection is still afforded to investors by having recourse to an underlying asset, ELSA said. Many providers have structured their products carefully to mitigate risks felt by investors - typically ensuring that the value of a fund is in excess of expected investor returns, to create a buffer or margin.

By its nature, a life settlement product - based on underlying insurance policies which will mature in the future - is a long-term investment, and is designed to be held until the end of the investment term, ELSA pointed out.

However, higher quality products define investor returns and any exit penalty at the point of purchase.

This means investors have the comfort of knowing they can exit early if they need to, sacrificing a defined portion of the income or capital growth.

In assessing any risk to capital and interest, ELSA emphasised that it was important to look at the quality of the product on offer. The advantage of investing in life settlements was that it was not a case of if underlying policies will mature, but when.

The association outlined key issues which investors needed to consider, namely suitability, the quality of products, and risk mitigation.

Established earlier this year, ELSA aims to standards for the European life settlement industry and promotes transparency by providing information to retail and institutional investors.