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The Journal of Structured Finance

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Primary Article

An Exploration of Mortality Risk Mitigation

Nemo Perera and Levi Pearson
The Journal of Structured Finance Summer 2007, 13 (2) 44-49; DOI: https://doi.org/10.3905/jsf.2007.690266
Nemo Perera
A managing general partner at Risk Capital Partners in New York, NY.
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  • For correspondence: nemo.perera@rcps.com
Levi Pearson
A managing general partner at Risk Capital Partners in New York, NY.
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  • For correspondence: levip@rcps.com
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Abstract

Investors transacting in life settlement policies face many risks. But the most often raised concern from any life settlement investor surrounds extension risk, which is the probability that an insured individual lives well beyond his or her life expectancy. The risk presents two problems: 1) that the death benefit arrives later but does not grow with time and 2) that the ongoing premiums drain the investment returns. However, with the consumer market pressing to cash in their insurance policies, equity investors expanding the life settlement market may find emerging mortality solutions will bring bankers to the table. This article explores several solutions that mitigate the mortality uncertainty and enable the successful execution of financial transactions. A life-contingent, single-premium annuity structure combines a single-premium immediate annuity with a settled life insurance policy, incorporating debt-like characteristics of principal protection while providing the necessary mortality hedge. Residual value insurance has been developed to insure a policy's future value, making premium finance programs that use traditional lending more efficient. Mortality index swaps, which utilize recently developed mortality indices, allow life settlement providers and life insurance companies to indirectly hedge each others' risks. Principal protection insurance protects a life settlement portfolio manager from extended life expectancy over an entire portfolio. Now with the innovative risk mitigation solutions emerging, investors are able to combine traditional lending facilities with mortality risk transfer products and thus deploy capital more efficiently towards life settlements.

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The Journal of Structured Finance
Vol. 13, Issue 2
Summer 2007
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An Exploration of Mortality Risk Mitigation
Nemo Perera, Levi Pearson
The Journal of Structured Finance Jul 2007, 13 (2) 44-49; DOI: 10.3905/jsf.2007.690266

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An Exploration of Mortality Risk Mitigation
Nemo Perera, Levi Pearson
The Journal of Structured Finance Jul 2007, 13 (2) 44-49; DOI: 10.3905/jsf.2007.690266
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  • Is Corporate Securitization Set to Take Off?
  • Another Active Year in the Life Settlement Industry
  • Evolution of the Life Settlement Industry
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