Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

There is a clear distinction between life settlement securitization and the sub-prime mortgage crisis


I’m sure that by now almost all of you will be aware of the article that the New York Times wrote a few weeks back which described life insurance settlement securitization as almost akin to the sub-prime mortgage securitizations which caused financial markets to implode. I didn’t write about it at the time as (no doubt you will already know this if you have more than a passing interest in insurance securitization) the life settlement market has existed for quite a while. It’ s still a relatively small market but financial firms have been looking to bundle up and offload their longevity risks for quite some time and investors have been more than happy to take on these risks in return for decent yields. Comparing the two markets is pretty naive and to say they could create a repeat of the sub-prime crisis is tantemount to ridiculous.

Anyway, I choose to highlight this now only because the Institutional Life Markets Association (ILMA) has made a statement on the subject in front of the U.S. House of Representatives Committee on Financial Services. The statement goes into detail as to why the comparison is irrelevant. The below paragraphs are taken from the press release from the ILMA.

When mortgages are securitized, or bundled and then cut up like a pie and sold to investors, there are two main parties at risk: the homeowner and the investor who purchased securities or pieces of the pie. This occurs because the homeowner or borrower may not be able to meet mortgage payments, said Kelly. Consequently, there is not enough cash flow to pass along to investors. The homeowner runs the risk of losing his or her home and the investor, the loss of cash flows, Kelly explained to lawmakers.

A life settlement securitization is different. The owner of the insurance policy who sells it receives payment right away. If the life settlement securitization fails, the only loser is the investor, Kelly told the subcommittee. Also, the source of payment here are high quality insurance companies. The major risk for the investor is the uncertainty associated with predicting longevity. Investors in life settlements are required to pay premiums to keep life insurance policies in the pool in force. Kelly also stated that because of the risk of loss, such investments are only suitable for institutional investors who can analyze and understand the risk in a life settlement securitization, as they should with any investment.

The ILMA is seeking to have strong regulation and oversight in place for the market, which is a very good thing and any financial market should have those protections in place. They conclude their press release by highlighting that these transactions are no different to other life securitizations, catastrophe bonds or even Regulation XXX transactions.

It’s worth reading the testimony in full as it really clarifies what this market is all about.

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