SubscribeThe Coming Death of the Insurance Industry
September 17, 2007
This is frank discussion about growing epidemic that is set to become one of this countries biggest scams. It is so monumental that it has the potential of bringing down the entire insurance industry… Seriously. If you scare easily, stop reading now. (Note: Podcast 28 has an amazing interview with Steven Leimberg on this subject, subscribe via iTunes to ensure delivery on Sept 19th)
Never before has the insurance industry faced such a cataclysmic onslaught of potential claims than they will begin to see in only a few decades from now. This is a crisis, which was set in motion by a rather innocent idea and has now turned into a greed-infested scheme. If left alone with no intervention, it will have us all looking back in 20-30 years wondering how and why we could of let this happen.
The financial media is finally picking this up as a front-page concern (Business Week Story) and we are seeing something new just recently with shares of Life Partners Holdings (LPHI) that is beginning to look rather ugly. But why is this coming to their attention just now? It is because for years now, the insurance industry has been systematically pilfered and companies are starting to worry about their future. What started out as a small crack, has now become a major crevasse. Is it will be a wonder if some of the companies will actually survive. No, No, No, not because of a hurricane or tornado. Not even from massive fires or devastating floods or the threat of global warming. Nothing natural can come close to how this is going to affect the industry. This is purely man-made.
It started with an idea from Prudential around 1988. At the time, it was innovative and extremely beneficial to policyholders. You see, back then; AIDS was causing a terrible problem as experimental treatments were very costly. When a patient’s money ran out – they had few alternatives. Prudential devised a way for those who were afflicted to sell their life policies for a substantial amount in return for assigning the death benefit back.
This was the incarnation of what was to become known as Viatical Settlements. The original plan quickly morphed into an investment scheme for many unscrupulous companies who realized that those that were in need of funds would sell their policies for almost any amount. Fair or not. Investors poured in with the promise that within a short time (as AIDS patients had limited life expectancies) they would profit by 15%-25% on their investment. Even as concern was raised about the morals of such a plan, Viatical Settlement companies were popping up in record numbers. It was on later that investors learned that this no-risk plan had many problems and their easy profit wound up turning into ugly losses.
Along the way, the greedy got rich by setting up phony guarantees and investors were fleeced of millions of dollars.
This was just the beginning. These days everyone profits from this (except the insurance industry) and it is finally becoming topic in focus. It can be said that the plan has morphed into a win-win-win-lose scheme.
Now you have a basic background and the genesis of Viatical Settlements - though they are now referred to as Life Settlements amongst the politically-correct. (Think of Stewardess/Flight Attendants and Garbage Men/Sanitation Engineers)
Today, the players are many and the scheme is gaining popularity: It did not stop there; in fact it only gets worse. Presently, the numbers are a lot bigger as the schemes get more and more crafty. These days, seniors are the ones that are selling policies to investor groups – and why not? They too are in for a piece of the profit.
Here is how a typical plan works: First, an insurance agent approaches a senior (usually 75 years old or so) and sees if they are willing to have a life insurance policy bought on their life. Often times, the insured will be required to have a net worth well in excess of $1 million as this plan works much better with higher death benefits. A company, specializing in loans for this investment plan, will advance the annual premiums for 2 years. This is important, as there is no money actually changing hands or expended from the insured to the insurance company. When the policy is issued, the insured usually retains the rights for exactly two years, until the contestable period is over.
Contestable Period Definition - Life insurance policy clause that provides a time limit (usually two years) on the insurer’s right to dispute a policy’s validity based on material misstatements made in the application.
When the loan comes due at the end of the “contestabilty period” the agreement will usually stipulate that the policy will revert ownership to the company (depending on the exact terms of the arrangement) that provided the advance on the premium (premium plus interest of 10% plus annually). This is important, as this is where the profit potential is realized - For the second time! From this point they try to sell the policy to other investors looking to profit from the death of the original insured – the third profit potential.
We could stop there and say that there are several issues that stink to high hell:
- 1) Insureds are induced to do this, as there is BIG MONEY in it for them; assuming all goes well. I have personally seen insureds receive $100,000 PLUS for simply standing in for an insurance exam and signing policy paperwork. I know of several more who received much higher “inducements”.
2) Agents stand to make huge profits as they are usually paid anywhere from 50%-70% of the first years premium on these types of policies.
3) The loans for the premium are charged at a rate significantly above market
4) The higher the death benefit, the better the plan works for all involved
a. Higher Premiums equal higher agent commissions
b. The greater the financial worth of an insured, the higher the death benefit
c. The higher the death benefit, the higher the premium resulting in the more “inducement” the insured will be paid
Here is where it gets tricky. Since there is a significant financial incentive to showing a net worth as high as possible; financial creativity is key. Valuations can be “enhanced” on real estate and businesses rather easily as can the approximated value of other assets. This is a real conflict that should be (but isn’t) taken seriously. Unfortunately, I have also seen several occasions where agents show insureds how to “optimize” these values in order to qualify for a higher death benefit. Just to be clear, this is not just a friendly exaggeration of values that one may do on the golf course. This could be deemed FRAUD.
The risk is weighed against the potential for a nice payday if the plan is approved. The usual decision is no surprise. (Picture the three monkeys with their hands over their eyes, ears and mouth)
Now, here is the reveal of how the life insurance industry is facing potential extinction if nothing is done:
As a practical matter, insurance companies build assumptions as to the percentage of policies written that will lapse into their pricing models. Since policies purchased only to be sold to investors will never lapse, insurance companies will have to pay claims much greater than they paid for. To add insult to injury, rather than paying full premiums, investors usually pay in only the minimum necessary to keep the policy going, thereby depriving the carriers of the capital necessary to invest to pay interest or dividends and cover maturing claims.
As for the insurance industry: “Be careful what you ask for; you might get it….” To be fair, the insurance industry is not without blame. They welcomed the record breaking sales and have turned a blind eye to the potential abuses in pursuit of short term profits. As one described it, “they took a bite of the poison apple; and they liked it….” Now, they’re bailing water as fast as possible to avoid the pending actuarial disaster.
The concept of life insurance was born out of a notion of public trust and common good and special tax incentives were granted as an inducement for bread winners to buy insurance to protect their widows and orphans from becoming wards of the state. While the greedy modern day robber barons will argue that it’s property and you ought to be able to do what your want with it, we can not lose sight of the fact that it’s a very special type of property and different from stocks, bonds, real estate and other commodities.
To purchase life insurance one must have an “insurable interest”- a risk of loss that would occur if the insured dies. Theoretically, one’s life and children are presumed to be better off if their husband or father stays alive. The purpose of the insurance is to replace some or all of the income the insured would have earned had he lived.
In these pre-sold, financial arrangements, it’s exactly the opposite. When outside investors are the beneficiaries, the sooner you die the better their internal rate of return. Life insurance is reduced to no more than a gambling contract which is against public policy.
With ever mounting deficits, it may only be a matter of time until congress strips life insurance of it’s favored tax treatment; thereby making it more costly for “Average Americans” to obtain the coverage they need and upholding a sadly ever-expanding phenomenon of the greedy few destroying an important family financial instrument for the masses.
Many carriers are now fighting back. Some send out investigators to interview insureds as to why they bought the insurance or what they expected would happen so they can rescind contracts. Others simply are refusing to accept collateral assignments and requests for change of ownership. Many have updated their applications to include questions that require disclosure of any financing arrangements, up front incentives or potential sales opportunities.
Even though promoters still tell prospects “not to worry about it” there’s Read more
Placations for a Financial Crisis - The Planner’s Playbook
August 30, 2007
There has been a series of financial planners on CNBC and other media outlets that have been discussing the recent market turmoil’s effect on clients. Specifically, there has been interest in whether or not clients have been calling and freaking out. This morning on CNBC, Alice Finn a financial planner from Ballentine, Finn & Company was interviewed. 
She commented (as has been the case with most planners), “Clients have not called, they are not as concerned and the phone has not been ringing. Clients are investing for the long haul and they are well diversified and have not called since they are comfortable…”.
She went on to discuss the difficulties of trying to time the market. Essentially, Ms. Finn contends that no one can time the market, as you will have to be right twice in order to succeed; when to get out and when to get back in. That seems to be a fair assessment.
Furthermore, she went on to talk about diversification and investing for the long haul and all of the other catch phrases that planners use. I too am fond of many of these. But, I contend that the reason clients have not been ringing the phone is twofold:
1) Summer Vacations
2) Statements have not gone out for August yet
These “phrases” are an excellent means to pacify clients during short corrections that bounce back quickly. If you read between the lines though, these are nothing more than standard comments by advisors that can be interpreted as; we are not doing anything to protect your account.
I am sorry to say that hollow phrases are not going to help if the market really declines. The truth is that diversification is fine through quick and shallow corrections, but when we see a protracted slide, there is nothing better than cash. Unfortunately, advisors who continue to believe that a “sit on the hands” mentality (albeit with crossed fingers) will allow for clients to weather major storms are plain ignorant. This is not to say that this is any time to panic. Nor is it a forecast that we are in for a major downturn. Rather, it is a lesson that we should all look forward to what is ahead in order to make appropriate investment decisions.
In this market condition, action is required to ensure that portfolios are allocation away from the areas that may be in for additional downside risk. Yet, time and time again we have seen comments from experts that look to provide comfort over action. Here are some of my favorite axioms that have been bantered around during market turmoil that are meant to mollify clients:
The Financial Planner’s “Placations for a Financial Crisis” :
- 1) Buy on the DIP
2) Diversification is key
3) We are in it for the long haul
4) Do not listen to the noise
5) There is plenty of liquidly in the markets
6) Great time to dollar cost average
7) The situation is contained
8 ) They’re not losses until you sell
9) Market Timing does not work
10) The 25 Year history of the S&P 500 shows….
11) Now is the time to buy, not sell
12) Only 5 days over the past 20 provided 80% of returns
13) This is healthy for the markets
14) Do not let emotions control your decisions
15) The S&P 500 has never had a negative 20 year return
Be smart, do what you know to be right from all of the information that is available and resist the urge to just sit and hope for the best. Re-evaluate your allocation, reassess the risk and act.
Good News for Hedge Fund Rats
August 28, 2007
Geron (GERN) a biotech company involved in Stem Cell research announced that they have seen success as human stem cells proved regenerative in the damaged hearts of rats.
The Menlo Park, Calif., biopharmaceutical company said the study’s data demonstrated that heart muscle cells derived from human embryonic stem cells improved heart function in rats when those cells were transplanted after heart attack. This comes at a great time as there has been an incredible amount of heartache that has been felt by many of the over leveraged hedge fund rats managers, it is about time that someone is looking for a cure. The fact is that is is awful that they have to suffer simply because of their uncontrollable greed. It is an illness and surely not intentional.
These stem cells will be put to good use as there has been an apparent outbreak of manager heartache as they have had to explain to their clients that they may not be able to provide withdrawal privileges as they underestimated the effect of 100%+ leverage. Maybe someone should have explained to these geniuses managers that if they play with fire they may get burned. While they are unemployed back in school, maybe they should also think about the millions of people they effected this time around.
It is our sincere hope that the sub-species of Primus Rat-eous (originating from the Banking Sector) will also benefit from this biotech breakthrough. The sad fact is that these particular little fellas have been recently found scrounging for food and shelter as they have been kicked out of their usual haunts. There are indications that there will be more sightings and a significant increase in the number of cases of heartache with these particular rats. FEAR THEM! They are very dangerous and will do anything to get to your money….
Can financial bloggers collect unemployment benefits?
August 15, 2007
“I rant and therefore I am”… Andrew Horowitz
Of Mice and Anal-ists
It is awfully irritating to read and listen to the post game shows. FELLAS: we already know that the market tanked! What we need is prediction and pre-market assessments! Unfortunately, it seems that the art of forward thinking is all but dead. This struck me hard as I listened to one of my favorite podcasts yesterday and heard strategist David Goertz from HighMark Capital give his best advice for this market. He went on to give two examples of stocks to own now; Intel and EMC.
Does he think we are idiots? EMC, the stock that spun off one of the hottest IPOs that day. EMC, who would benefit from the 90% ownership of VMWare that opened at $50 from an IPO pricing of $29? Fortunately, he did go on to predict that it would be light during the day and dark at night…
Just a few weeks ago, anal-ists and rye-ters were all singing the praises of this market. They were chirping a lovely tune about the immense amount of liquidity and opportunities ahead of us. Little was said about the growing chinks in the armor that seemed as apparent as the “pink-on-cramer.”
Now, the “experts” on sites like bloggingstocks.com are busy telling us how the market may move lower and it seems that bullish commentary is hush. Thanks! These are the same amateurs that make the same mistakes time and time again only to find themselves out in the cold with no jackets during the winter months.
To be honest, I really wonder if many of the folks discussing the markets are simply out-of-work real estate moguls, now turned investment advisors. Whatever they are, I think that if THE Donald were here, he would surely say…YOUR FIRED!
The Numbers Don’t Lie…
This time around (which by the way is no different than any other time, even though they always say: “it is different this time…”) we are seeing a spike in the number of financially oriented websites along with a slew of bloggers who are benefiting no one. Their hyperbole and hysteria surrounding names like Baidu (BIDU), Apple (AAPL) and Croc’s (CROX) is enough to make anyone feel sorry for their misguided optimism. These are not bad companies; we are simply seeing bad analysis of these companies.
I recall a time that we saw an amazing increase in the number of Series 7 registrations in 1987, Real Estate Agents in 2005 and the record breaking number of CFP applications in 1994. What these have in common is the simple fact that people want in on the action. Greed and Fear, the two most talked about words these days are always at work in the financial arena.
ARMs For The Poor
Now, the record number of financial blogs, podcasts, wiki’s and television shows along with the countless number of money related sites should have been an enormous warning flag. When we allow ourselves to believe the talk of the time and buy into what we know to be counter-intuitive (right, so you believed that 100% financing and interest-only ARM loans posed no long-term problem) a light bulb should go off (actually, 50,000 volts should pass though our body) to remind us that something is not quite kosher.
In the end, these types of market corrections help to wash out the excess. That excess pertains to stock prices as well as the hot-air blogging fad. Watch and wait… I hope at least, for their sake, they will be able to collect unemployment benefits.
* Note: Discussion is somewhat limited to those “part-time” bloggers who write for THEIR own benefit. You know who you are….
China Conspiracy Continues
August 15, 2007
Well, if you are still unconvinced about a convert and concerted effort by US manufacturers and/or our government against China, take a look at these few items that hit the news today..Do I sound paranoid?: (also see previous post on TDI)
COMMENT on this please on what you think….Look for Poll on this later
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