Research and Information
THE WHARTON SCHOOL STUDIES
This asset class intrigued The Wharton School, one of the most respected business schools in the world, to such a degree that they conducted two separate studies. The first study, published in 2002 as the industry was starting to blossom, identified the benefit to the senior. They discovered through a study of a random group of policies that the surrender value (amount received from the insurance company if the policy is cancelled) amounted to a total of $93.4 million dollars in comparison to the $336.3 million dollars a senior would receive by selling their policy into the secondary market. This represents a shocking 360% difference between the cash surrender value and selling the policy as a Life Settlement. Again the benefit to the senior is obvious.
EVOLUTION OF LE PROVIDERS
Life expectancy estimates are used to determine the selling price of a life insurance policy being sold. In essence, an investor with a defined expected return will pay more for a policy if the life expectancy is shorter, and will pay less if the life expectany is longer. Life expectancy underwriting must be accurate and consistent. If life mortality distribution estimates are too high, investors will overpay for policies and end up with lower returns than expected. Conversely, mortality distribution estimates that are too low will result in prices that are under the policies' economic value and sellers will not receive fair value for their policies.
THE MERLIN STONE REPORT
When economic historians look back at the financial crisis of 2007-2009, they will see all the main asset classes - equities, bonds property and even cash, in the form of funds - nose-diving together undermining the long held mantra that diversification is a form of risk control.
They may also see it as the catalyst for the emergence of a new uncorrelated asset class. For during those turbulent two years, one class of asset that offered the potential to deliver steady, predictable returns was traded life policies (TLPs), also known as life settlements.When the first Merlin Stone Report was published in 2007, the credit crunch was already beginning to take hold and financial markets were in turmoil. That report highlighted TLPs as a relatively new asset class that offered investors a safer haven for their money in the terrible market conditions that were ensuing.
LBS REPORT
Over the past few decades, there has been a signicant increase in longevity and decrease in birth rates.1 These demographic trends have accentuated the underfunding of defined benefit pension plans and increased the pressure on U.S. government social insurance and health programs, such as Medicaid and Medicare.
In recent years, a secondary market for life insurance policies has developed that could increase the flexibility of the financing choice of retirees. A life settlement is a transaction in which a life insurance policyowner sells a policy to a third party for more than the cash surrender value (CSV) offered by the life insurance company. The buyer pays all subsequent premiums to the life insurance company and receives the net death benefit (NDB) of the policy at its maturity. In terms of cash flows, for the buyer, a life settlement is a negative coupon bond with uncertain duration. For the seller, it is a form of equity release similar to that in a reverse mortgage.
