The Effect of Probabilistic and Stochastic Valuations
versus a Deterministic Valuation of Securitized Senior
Life Settlements on the Level of Liquidity Facility

Abstract

This article attempts to demonstrate the importance of modeling cash flows at each point in time, generated by a securitized pool of senior life settlements, when establishing a liquidity facility and its level. The liquidity facility is a critical component of credit enhancement in the securitization of senior life settlements. There are three main methods when valuing senior life settlements. The first uses a deterministic approach; the second, a probabilistic approach; and the third, a stochastic approach (Monte Carlo model). Although obtaining similar values with the three different methods is possible, we show how critical the chosen method is for establishing the level of liquidity facility in the process of securitizing senior life settlements.

TOPICS: Retirement, pension funds, wealth management