Extending the Efficient Frontier through Life Settlements

Abstract

With the increasing acceptance of life settlements as an established asset class, institutional investors have begun to take serious notice that life settlements offer an attractive advantage because of their low correlation to other asset classes. Indeed, since modern portfolio theory is largely based upon the diversification of assets with low or negative correlations, it follows that incorporating pools of life insurance or longevity-linked instruments into a portfolio of diverse assets can significantly enhance a portfolio's performance. This article goes beyond this basic observation to explain why longevity and mortality-linked instruments will play an increasing role in the future development and construction of institutionally managed portfolios.