Monday, 27 May 2019

A secondary market for life insurance using blockchain

Many policyholders are unaware that they can sell their life policies. Depending on location, secondary markets currently are at best opaque and obscure and at worst non-existent. Singapore-based startup fidentiaX plans to change that.

The demand

Seniors often wish to exit their life insurance commitments for various reasons. They may need the money for care or medical expenses, they may no longer be able to afford the premiums, or perhaps the beneficiary doesn’t need the money.

In the US, 250,000 policies a year with a face value of more than $57 billion are lapsed and surrendered back to life carriers. The average face value of a surrendered policy is approximately $225,000 as of 2010 (Source: Welcome Funds). Another study showed that only 50% of seniors are aware they can sell their policies.

Nonetheless, there’s a small industry focused on “Life settlements” which involves buying the policies from the insured. The ultimate investors are wealthy individuals, Alternative Investment Funds, hedge funds and some institutions.

The type of life insurance varies by country. In the US the focus is on universal and variable life policies. Hence policy valuation primarily uses life expectancy.

However, in other jurisdictions such as Germany and Asia, the emphasis is on endowments. As a result, the investment aspect plays a more prominent role in valuation than life expectancy. And people of all ages have changes in circumstances which mean they want to reduce outgoings or sell investments.

FidentiaX’s co-founder Alvin Ang explains: “We are focused on the cash value of the policy. We are not trying to be a death merchant. So we don’t want the investor to buy the policy for the potential payout for death. We can’t stop them from doing that. We have an actuary within the company that will make price recommendations based on the surrender cash values.”

“We’ll be looking at endowment, universal life, whole life. Plans that have inherent cash values – participating plans. Cash value is something that is guaranteed that is yours.”

The benefits

For the policyholder, a secondary market provides greater flexibility and could encourage more people to take out insurance. For example, in the US there is currently very low growth of only 1% a year.

For the insurers, the broadened consumer options could be a boon for sales. Though with greater consumer knowledge, that $57 billion (face value) of lapsed policies will decline.

Ang reckons there’s a secondary benefit to insurers. “During the Lehman crisis, there was a lot of surrendering of insurance policies, because everybody was faced with a liquidity crunch. When there’s a sudden drawdown of funds due to surrendering of policies, they have to liquidate assets at a non-optimal value. Having a tradeable marketplace acts as a dampener to the whole crash. It reduces the volatility to some extent.” That said, there’s a good chance the secondary market could also freeze up during a major crisis.

For knowledgeable investors, it’s an attractive opportunity. The US market tends to offer returns that don’t correlate with other asset classes. Even in endowment markets, life insurer returns are smoother compared to other investments. According to BVZL, secondary market returns for US life settlements were 12-18% IRR annually as of December 2013. However, US settlements are relatively risky.

Ang explained: “The issue in the US is when you make a purchase from a 65-year-old there is this question mark over whether the guy knows what he’s actually selling.” What if the policyholder is a smoker but claimed he wasn’t and the insurer refuses to pay. There are tax risks and many others, hence the attractive returns.

According to Ang, currently some middlemen buy and re-sell tradeable policies at a significant markup. Whereas with fidentiaX’s marketplace, the middleman stands to lose the most.


In Asia, this is a relatively under-regulated area. Asked if fidentiaX was in a sandbox, Ang said: “We do not see a need to be in a sandbox because in Singapore and the few countries that we are exploring, there are no prescribed regulations on tradeable insurance. This could be due to the lack of awarenes