Life Settlements

Abstract

Acquirers of life settlements or investments linked to them rely on medical underwriters to help assess the mortality risk for each underwritten life. However, for the non-actuary investor, evaluating potential deviations in actual experience from the underwriters' assessment relative to the investors' risk tolerance is a critical challenge. This article provides a framework for the development of a methodology for the investment community to understand potential deviations from expected experience for a life settlement portfolio. When considering an investment in an asset in which cash flows are backed by the economics of life insurance policies, the investor should consider 1) eligibility guidelines for the pool of lives underlying the investment, and 2) expected return on the investment and related risks. Because mortality risk is the primary risk, an understanding of the underwriting process for each individual life insurance policy is a key to analyzing the investment.

TOPICS: Legal and regulatory issues for structured finance, legal/regulatory/public policy