Sunday, September 06, 2009

Markets in Everything: Life Insurance Securitization

NY Times -- Bankers plan to buy “life settlements,” life insurance policies that ill and elderly people sell for cash — $400,000 for a $1 million policy, say, depending on the life expectancy of the insured person. Then they plan to “securitize” these policies, in Wall Street jargon, by packaging hundreds or thousands together into bonds. They will then resell those bonds to investors, like big pension funds, who will receive the payouts when people with the insurance die. The earlier the policyholder dies, the bigger the return — though if people live longer than expected, investors could get poor returns or even lose money.

Defenders of life settlements argue that creating a market to allow the ill or elderly to sell their policies for cash is a public service. Insurance companies, they note, offer only a “cash surrender value,” typically at a small fraction of the death benefit, when a policyholder wants to cash out, even after paying large premiums for many years. Enter life settlement companies. Depending on various factors, they will pay 20 to 200 percent more than the surrender value an insurer would pay.

Securitized life policies have big potential for investors who want to spread their risks and are constantly looking for new investments that do not move in tandem with their other investments. Some academics who have studied life settlement securitization agree it is a good idea. One difference, they concur, is that death is not correlated to the rise and fall of stocks.

The insurance industry is girding for a fight. “Just as all mortgage providers have been tarred by subprime mortgages, so too is the concern that all life insurance companies would be tarred with the brush of subprime life insurance settlements,” said Michael Lovendusky, vice president and associate general counsel of the American Council of Life Insurers, a trade group that represents life insurance companies.

And the industry may find allies in government. Among those expressing concern about life settlements at the Senate committee hearing in April were insurance regulators from Florida and Illinois, who argued that regulation was inadequate.

Thanks to Jeff Lehner.


At 9/06/2009 9:26 AM, Blogger KipEsquire said...

How is this different from the massive HIV viatical catastrophe* in 2001?

(*"Catastrophe" from the perspective of the investor, of course, and not from the perspective of the PWA who, thanks to anti-retrovirals, did not die on schedule.)

At 9/06/2009 1:23 PM, Blogger Tim Worstall said...

If it's safe for a life insurance company to hold a widely diversified protfolio of life insurance risks it must be OK for an individual investor to own a slice of such a widely diversified pool. What are stocks and bonds in life insurance companies but that very thing?

At 9/06/2009 2:22 PM, Anonymous Anonymous said...

European banks have been buying Life Insurance payouts on Americans for nearly ten years now. Unfortunately, Americans aren't dying fast enough and now the Euro banks are starting to grumble about that.

Betting On U.S. Life Expectancy Proves Risky

At 9/06/2009 6:40 PM, Anonymous Anonymous said...

The market for hit men will be booming!

At 9/06/2009 8:28 PM, Anonymous lucydrake said...

as long as my taxes don't go up even further than they already have been...we will be the poorest country all around if we continue in this fashion...people, wise up!!!

At 9/06/2009 8:29 PM, Anonymous Anonymous said...

First thing I though when I read this in today's newspaper was "OMG, they haven't learned a thing".

It never ceases to amaze me how Wall Street manages to create new (and perhaps dubious) investment schemes in order to make money.

Excuse me for my skepticism of the word "securitize". That appears to me to be one of the red flags that waved during the toxic asset/mortgage mess.

At 9/07/2009 2:29 AM, Anonymous Anonymous said...

Just as all mortgage providers have been tarred by subprime mortgages, so too is the concern that all life insurance companies would be tarred with the brush of subprime life insurance settlements

What the heck is the speaker talking about? What possible negative press will the insurance company be subject to? If anything, all the negative press is directed at viatical purchasers, who are portrayed as profit-seeking scum.

At 9/10/2009 9:46 AM, Anonymous Gitangsu's Insurance Guide said...

What negative press would the company face? Please explain.


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