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Old 07-27-2019, 06:48 PM
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Default Secondary market for life insurance / life settlement funds - basic questions

I know someone who runs a wealth management firm and wants to start a life settlement fund. I am not sure how imminent this is, or how serious he is, but I am looking to learn as much I can on this topic.

I come from the P&C side. Is this niche area covered on any of the SOA exams? I know there are some unique considerations here. I can gather much of this from googling articles but wonder if there is an official syllabus paper.

What is the size of this market? Does anyone here work in this area?

TIA
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Old 07-27-2019, 06:50 PM
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PS I haven't posted here for 13 years what's new?
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Old 08-06-2019, 02:06 PM
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I'm not personally familiar with this topic, but it was lightly covered when I took the Life Pricing exam on the Individual Life and Annuities track. I just checked a recent syllabus, and this is the only associated reading I could find:

LP-133-16: Testing for Adverse Selection in Life Settlements: The Secondary Market for Life Insurance
Policies, Januario & Naik, Jul 2014, pp. 1-20
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Old 08-06-2019, 04:53 PM
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This market has had a lot of problems in the past. The underwriters have often mispriced the business, and the investors on the back end have borne the cost. We've looked at this market a lot, and have always walked away.

Because the marketers make a lot of money, it is great for them. The policyholders make out ok at times, especially if they want to get rid of their policy, since they get some dollars instead of nothing. But unlike regular life insurance, the policyholder is motivated to represent every ailment they have, and life underwriters simply don't have experience with that aspect of their profession. They will have a tendency to overestimate the "rating" of the policy, and thus underestimate the life expectancy.

This market peaked in about 2004-2005, and while the volume has come down, and underwriters have learned a bunch, I'm pretty sure it is not a business in which I'd want to get involved.

It is worthwhile putting together a pricing spreadsheet that shows how the various stakeholders make out under various pricing assumptions. Hint - don't use single point estimates for life expectancy; rather use a standard select and ultimate mortality table, such as the 2015 vbt. (No insurer uses that table without adjustment, but even a simple multiplier will help you understand the math.)

You will see that the salesmen always make out really well, since they aren't impacted at all by wrong assumptions. Similarly, the policyholder gets a single payment, and is out of the picture. But the insurer who takes the risk will see widely varying results depending on the performance of the block.
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Old 08-07-2019, 10:25 AM
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There is a lot of "moral hazard": both the policyholder and broker/salesman have an incentive to make out that their health is worse than it actually is, to maximise their payout/commission.

You need a mechanism, or intermediary, to continue monitoring the insured life after the fund has purchased the policy. (And by that time the policyholder doesn't really have any incentive to fully co-operate).

And check out the cashflow requirements from the fund's perspective. For most policies it isn't just the initial investment, but a need to continue funding the premums while the insured life is alive. Even a small adverse (i.e. lighter than expected) mortality experience can mean a need for significant additional capital many years in the future. If you don't have access to such capital at that time the fund may collapse.

And it can be a difficult market to explain to potential fund investors, because at any one time a significant proportion of the fund's capital will appear to be "uninvested", being required for those future premiums.
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Old 09-09-2019, 06:49 PM
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Thanks everyone. As of now this guy is still raising funds but is already buying policies. In his words, he is relying on the brokers a lot and "is giving a big cushion" which I took to mean being very selective at this point, and not ready to dive in head first yet. Sounds like there is one really big player in the space, and due to all the moving parts there is a ton of room for innovation but the expenses can be a hurdle.
We didn't talk about this as much as I thought but I am going to keep chatting with him.
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