Life settlements: descriptive analysis and quantitative aspects

Un life settlement es una transacción financiera por la que el tomador de un seguro de vida, pagadero al fallecimiento del asegurado, vende su póliza a un inversor por un precio superior al que obtendría en caso de rescatar dicha póliza. De esta forma, el inversor asume el compromiso de pagar, si existen, las primas pendientes y adquiere el derecho de cobro de la suma asegurada cuando el asegurado fallezca. En el presente trabajo se realiza tanto un análisis descriptivo de este tipo de transacciones, como un estudio de sus principales aspectos cuantitativos. Así, entre otros aspectos, se ofrece una visión general del producto y se describen sus principales actores, la naturaleza de los parámetros que intervienen en su valor y los riesgos asociados en relación a éste. Desde el punto de vista cuantitativo, se introduce una nueva forma de analizar la sensibilidad del precio de un life settlement frente a variaciones de la esperanza de vida del asegurado. En efecto, extendemos los indicadores duración y convexidad de Stone y Zissu (2008), que usan un enfoque determinista, al marco analítico que proporciona el método de valoración denominado probabilístico y proponemos medir la sensibilidad del valor de este producto frente a variaciones del multiplicador de la probabilidad de mortalidad del asegurado, y no de su esperanza de vida. Asimismo, se describe la aplicabilidad de las nuevas medidas para la gestión de riesgos.

Asymmetric information in secondary insurance markets: Evidence from the life settlements market

We use data from a large US life expectancy provider to test for asymmetric information in the secondary life insurance—or life settlements—market. We compare realized lifetimes for a subsample of settled policies relative to all (settled and nonsettled) policies, and find a positive settlement‐survival correlation indicating the existence of informational asymmetry between policyholders and investors. Estimates of the “excess hazard” associated with settling show the effect is temporary and wears off over approximately 8 years. This indicates individuals in our sample possess private information with regards to their near‐term survival prospects and make use of it, which has economic consequences for this market and beyond.

Analyzing the Different Modules of Longevity Risk in Death Bonds

The author presents an actuarial prognostic model that can disentangle and assess two complementary modules of longevity risk for death bonds. He tracks the probable paths over time of the transition rates for life settlement issuers across three states of nature: healthy, terminally ill, and dead. Through that, he is able to examine the influence of some varying assumptions on the likely course of the inclusive death intensity for an underlying pool of life settlements. The author is thus able to enhance transparency in this market by better predicting the overall yield curves of death bonds and their feasible trajectories. The proposed model can assist life settlement providers, brokers, investors, and credit raters in planning and preparing for possible evolutions in the overall death intensity among pools of life settlement issuances.

Life Settlement Value Profiles across Different Death Rate Distributions

The life settlement asset class is a recognized part of the alternative investment market. Our article offers insight into the behavior of portfolios of life settlement contracts. We focus on the value profiles of pools of life settlement contracts in the value/cost of capital space. A pool of life settlement contracts has a death rate distribution that will determine the amount of premiums that must be paid each period and the amount of death benefits that will be collected each period. Because value is determined by the timing, magnitude, and certainty of the cash flows generated by an asset, it is inexorably linked to the timing of the life settlers’ deaths. We show that when certain conditions are met, pools with fundamentally different underlying mortality rates and risk profiles, but with the same cost of capital, can have the same value (pivot point in the value/cost of capital space). This pivot point can be useful for fund managers seeking to modify a portfolio of life settlements under a specific cost-of-capital constraint.