Life Settlements Bob Holliday FSA MAAA June 15, 2006

Transcription

1 Life Settlements Bob Holliday FSA MAAA June 15, 2006

2 Movie plot and subplots Civil War success if other side dies Bounty Hunting money to turn in criminals expected to hang Clint expected death but survives Eli death expected also Lee - Buried Treasure / Final Shootout hope to profit from others deaths Similar to Life Settlement Investing 2

3 What is a Life Settlement? Involves transfer of a life insurance policy from one party to another in return for a cash payment at transfer Usually is irrevocable assignment Beneficiary is the new owner Insured has no further rights or obligations New owner will pay premiums and receive proceeds Assumes health of policyholder has deteriorated Usually death in somewhat near term expected 3

4 What are Life Settlements? Developed from prior Viatical Market Insured with <12 months to live (AIDS) Need money for Medical Expenses No Beneficiaries Pay Enhanced CV now instead of Face Amount later Marketplace collapsed after AIDS drug cocktails High Expected Returns not realized LS longer life expectancies 4

5 What are characteristics of an average Life Settlement? Average age 75 Average Face Amount over $1 million LE of 3 to 10 years ( some 0-12) Results are like a substandard annuity or a reverse mortgage Investor profits from earlier deaths 5

6 Life Settlements? Great return for investors IF--- Insured dies quickly High Expected Returns then realized Not so good for insured? Better to keep policy when possible? No law of large numbers apply Various opinions 6

7 Good Older Age Patient Terminal condition Policy if force for many years Money needed for Medical Expenses No Beneficiaries Obtain Higher Cash Value Last Survivor after first death Corporate (COLI) situations Need proceeds for LTC needs 7

8 Bad Recently issued policy Smoker has non-smoker policy Medical information inconsistent Beneficiaries not informed Money to be used to buy other life insurance coverage 8

9 Ugly Providing loans to purchase new policies Promise that they will have LS value in 2 years High lapses if healthy Charitable giving schemes Broker fee based as a % of Face Amount not on the Economic Value 9

10 Other factors Small restricted marketplace High Broker charges Reinsurance needs GAAP Accounting concerns Regulatory issues Ethical issues Life Insurance Companies Response 10

11 Economic Value What is the value of a life policy? Need to understand cash flows Premiums Expenses Brokerage Reinsurance Other Death Benefit received 11

12 Broker Cost Insured Reinsurance Broker Premiums 12

13 Reinsurance costs to protect against too long LE Insured Reinsurance Broker Premiums 13

14 Distribution of Funds Insured Reinsurance Broker Premiums 14

15 Life Settlement Pricing Needs DOB, Age, Issue Date Life Expectancy Info LE50 LE85 Future Cash Flow needs Premiums / COIs Expenses annual costs, fees, Brokerage ROI needs 15

16 LE Needs DOB, Age, Issue Date Sex, Smoking Status Extensive Current Medical Information Medical Underwriting Expertise What u/w Manual used current? How are uninsurables treated How is manual rating conservatism overcome Results in LE ( and rating usually) 16

17 Pricing Methods Deterministic - All die at LE Probabilistic Gradual flow of deaths Stochastic methods multiple scenarios 17

18 Deterministic - All die at LE Assumes all Cash Flow will be received at LE50 or LE85 Understates gains from early deaths Overstates results from later deaths Premium payments needed past the LE may be missed Assumes a more certain world than actually exists Holdover from Viatical approach 18

19 Probablistic Method - Deaths from mortality curve Death benefit cash flows based on mortality assumption What table - was 75-80, now 2001 Basic Slopes very different Select period when starts, how long Super select in the short term? Accurate mortality rating Use of Mortality Improvements past and future? Premiums usually included as a negative cash flow 19

20 Stochastic Methods from multiple scenarios Projections produce mean results Also give deviations of results Larger deviations = more risk More deviations/risk with: Smaller number of policies Disparate size of benefits Premium cost Risk/reward relationship can be examined 20

21 Graph of Results - LE Death Benefits Survivors Year 1 Year2 LE Year 21

22 Graph of Results - DM Death Benefits Survivors Net Cash LE-3 LE-2 LE-1 LE LE+1 LE+2 22

23 Graph of Results - SM Survivors Low Range Mean Benefits High Range LE-3yr LE-2yr LE-1yr LE LE+1yr LE+2yr 23

24 ROI Results (DM) by quarter 25% 20% 15% 10% 5% 0% ROI 24 Later deaths Early Deaths LE

25 ROI Results(SM) by quarter 40% Upper Range 35% 30% 25% Mean ROI Lower range 20% 15% 10% 5% 0% -5% Early Deaths LE Later deaths 25

26 Impact on Direct Companies Lapse Assumption Changes If lapse supported profits may not realized Usually lapses are bad but Last Survivor Policies Long term mortality assumptions Worse lives will persist overall mortality worsens Counter Measures 26

27 Future Developments Reporting Issues Licensing Requirements LE Validation Market Tightening? Broker Compensation Market Availability Life Companies Reaction Spitzer Action 27

28 Life Settlements Questions? Bob Holliday