Coventry Direct complaint alleges firm has ‘skewed’ life settlement market

Coventry Direct, the nation’s largest life settlement company, has alleged that Lapetus Solutions Inc., a life expectancy underwriter, has inaccurately lowered life expectancy estimates, boosting the value of life insurance policies, potentially endangering investors, and skewing the entire mortality risk assessment market.

Coventry Direct, which pioneered the life settlement industry – or the viatical settlement market – in the early 2000s, relies on companies like Lapetus Solutions to assess the value of life insurance policies it considers purchasing from policyholders and selling on a secondary market. Coventry helps people sell their life insurance policies for cash instead of letting them expire or canceling them.

Lapetus Solutions, which uses AI, biometric data, and medical analytics to estimate human life expectancy, has faced criticism for allegedly producing estimates that significantly understate actual life expectancies. A shorter life expectancy estimate increases a policy’s value by reducing the total expected premium payments required to maintain the policy and bringing forward the anticipated date for the payment of the policy’s death benefit. This issue has raised concerns about potential overvaluation of life insurance policies and the risk of investor losses.

Study finds Lapetus estimates in error

A Coventry-backed study conducted by professors Daniel Bauer and Nan Zhu, analyzed 4,378 underwritten reports. The study found that while Lapetus Solutions’ calculations predicted 648 policyholder deaths during the study period, only 203 deaths occurred, resulting in a 31% ratio of actual to expected deaths. This suggests that Lapetus Solutions’ life expectancy estimates may be materially shorter than actual outcomes.

Furthermore, Coventry maintains that its own internal review revealed that Lapetus’s life expectancy estimates were shorter than those of other leading providers in 85% of cases, potentially leading to overvaluation of life insurance policies and investor losses. The review suggests that Lapetus Solutions’ use of a general population mortality table, rather than one based on an insured population, may contribute to these shorter estimates.

Coventry officials say Lapetus Solutions’ numbers don’t directly affect its business but should be a warning for potential investors in the viatical settlement market and should alert regulators about possible inflation of financial assets.

Lapetus Solutions says its life expectancy assessments are hyper-personalized and conducted by board-certified physicians, aiming for an actual-to-expected ratio of more than 96%. It offers various reports, including pharmaceutical and clinical analyses, to support life settlement investment decisions.

Access to Lapetus audit reports sought

Coventry has asked Florida insurance regulators for access to Lapetus Solutions audit reports it is required to file with the state and has gone to court contending they should be part of the public record. The Office of Insurance Regulation has refused to produce them saying the reports constitute trade secrets.

Coventry last week filed a Writ of Mandamus with the Circuit Court in Leon County, Florida, seeking to compel the OIR to release the audit reports.

“Chronically and extremely short, inaccurate Life Expectancy reports are a danger to the viatical settlement market because investments based on inaccurate reports are doomed to long-term failure,” the Coventry complaint reads.

Estimates 'skewed' the life settlement market

Coventry said Lapetus’ issuance of “chronically short Life Expectancies has skewed the entire life settlement market.” It said Lapetus Solutions’ life expectancies have a significant influence on the market through, among other things, the company’s “unique relationship” with Abacus Global, a group of life settlement companies that use Lapetus Solutions as their preferred life expectancy provider.

Abacus – whose main asset is life policies it has purchased – is a publicly traded company whose shareholders’ investments are dependent on the accuracy of life expectancy estimates used to value policies. As of September 30, 2024, according to the complaint, these life policies are valued at $273 million.

“That is a 124% increase in nine months, a time period coinciding with The Life Settlement Market Update which found that Lapetus’ Life Expectancies were so short that Lapetus had singlehandedly caused industrywide Life Expectancy averages to ‘fall significantly short of expectations,’ ” the Coventry complaint say.

“When policies are valued based on life expectancies that are too short, the resulting policy valuations will be higher than they should be,” said Alan H. Buerger, Coventry’s co-founder and executive chairman. “Funds and companies like Abacus that rely on Lapetus to provide life expectancies for their policy valuations could soon face growing challenges with serious consequences for investors and the broader life settlement industry.”

Buerger has said there is an urgent need for Lapetus Solutions to reassess its mortality assumptions, underwriting models, and methodologies to provide more accurate life expectancy estimates. He notes that several would-be competitors to Coventry have failed because of regulatory uncertainty, mispricing issues, or investor pullback.

Lapetus Solutions, Inc. is not the largest company in the life expectancy underwriting space for the life settlement industry. While it’s a known player—especially due to its use of AI and biometric data in underwriting—it is considered one of several smaller or mid-tier firms in the space.

Nevertheless, because institutional investors (like hedge funds, pension funds, or PE firms) rely on accurate life expectancy data to project returns, overly optimistic estimates (i.e., showing people dying sooner than they actually do), could shake confidence in the whole asset class, trigger regulatory interest or legal reviews, and cause investors to pull back or demand higher returns, reducing capital flow, analysts say.

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Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at doug.bailey@innfeedback.com.