One of the great things about working in third-party marketing is that you get to meet all kind of investment managers from around the world. Over the past few months I have participated in the research effort on a very exotic asset class: life settlements. We met with a number of leading managers in the space, and had some very interesting discussions. Now I am clearly not an expert on the subject, but I believe some facts and thoughts below will still be interesting to share.
What are life settlements as an asset class?
Put briefly, life settlement is an investment product that leverages on the fact that life insurance in the US is considered a real property, and as such, can be bought and sold. To the best of my knowledge, this is only possible in the US.
The underlying asset is the life insurance policies held by elderly individuals, who for some reason don't need the policy anymore, and would like to receive more than the surrender value that the insurance company is prepared to pay (which is a minuscule fraction of the insurance premium contingent on the insured person's death). The life settlement company assumes the responsibility to make the regular payments, and collects the premium on policy maturity. So, the ethical question of betting on someone's death apart, life settlement theoretically benefits both the seller and the buyer of the policy. But that is not always the case.
A little history
Life settlements originated as the means of financing medical costs for people with very short life expectancy, such as AIDS patients (so called "viatical policies"). Now these life settlements generated very negative image of the asset class, firstly because of the unpleasant association with people on the brink of death, and secondly because in many cases they did not pay off as investments. They didn't because the advance of medical science actually enabled those patients to live much longer than originally expected, and the life settlement companies had to keep paying the costs well beyond the point where they anticipated the premiums to be collected.
It's all about statistics and risk management
As far as I came in my understanding, the key pieces in making life settlements work as investment, are (1) to get the life expectancy right, and (2) to smooth the returns. It's too early in the educational stage for me to share the reasons for such belief, but at this point they seem quite sound.
What is important to note however, is that whatever numbers you get reported as NAV are mark-to-model, so it is no wonder they often plot as a perfectly smooth line.
The Golden Rule of investment
As many people know, the Golden Rule of investment is "don't invest into anything you don't understand". For me, there are still many questions that need to be answered before making any conclusions about life settlements, but I hope this post will help answer at least the very basic ones for everyone reading it.
■
What are life settlements as an asset class?
Put briefly, life settlement is an investment product that leverages on the fact that life insurance in the US is considered a real property, and as such, can be bought and sold. To the best of my knowledge, this is only possible in the US.
The underlying asset is the life insurance policies held by elderly individuals, who for some reason don't need the policy anymore, and would like to receive more than the surrender value that the insurance company is prepared to pay (which is a minuscule fraction of the insurance premium contingent on the insured person's death). The life settlement company assumes the responsibility to make the regular payments, and collects the premium on policy maturity. So, the ethical question of betting on someone's death apart, life settlement theoretically benefits both the seller and the buyer of the policy. But that is not always the case.
A little history
Life settlements originated as the means of financing medical costs for people with very short life expectancy, such as AIDS patients (so called "viatical policies"). Now these life settlements generated very negative image of the asset class, firstly because of the unpleasant association with people on the brink of death, and secondly because in many cases they did not pay off as investments. They didn't because the advance of medical science actually enabled those patients to live much longer than originally expected, and the life settlement companies had to keep paying the costs well beyond the point where they anticipated the premiums to be collected.
It's all about statistics and risk management
As far as I came in my understanding, the key pieces in making life settlements work as investment, are (1) to get the life expectancy right, and (2) to smooth the returns. It's too early in the educational stage for me to share the reasons for such belief, but at this point they seem quite sound.
What is important to note however, is that whatever numbers you get reported as NAV are mark-to-model, so it is no wonder they often plot as a perfectly smooth line.
The Golden Rule of investment
As many people know, the Golden Rule of investment is "don't invest into anything you don't understand". For me, there are still many questions that need to be answered before making any conclusions about life settlements, but I hope this post will help answer at least the very basic ones for everyone reading it.
■
Comments