Life settlements: descriptive analysis and quantitative aspects
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Published
10-12-2020
Jorge de Andrés-Sánchez
Laura González-Vila Puchades
Abstract
A life settlement is a financial transaction by which an existing life insurance policy is sold to an investor for a greater price than its cash surrender value. In this way, the investor undertakes to pay, if any, the outstanding premiums and has the right to receive the death benefit when the insured dies. This work carries out a descriptive analysis of this type of transaction and a study of its main quantitative aspects. Thus, among other aspects, an overview of the product is offered and its main agents, the nature of the parameters involved in its value and the risks related to it are described. In regards to the quantitative point of view, a new way of analysing the sensitivity of the price of a life settlement to changes in the insured’s life expectancy is introduced. Indeed, we extend the duration and convexity indicators of Stone and Zissu (2008), which use a deterministic approach, to the analytical framework provided by the probabilistic valuation method. Then, we propose to measure the sensitivity of this product to changes in the insured’s mortality multiplier, and not in their life expectancy. The paper also describes the applicability of the new measures for risk management purposes.
How to Cite
de Andrés-Sánchez, J., & González-Vila Puchades, L. (2020). Life settlements: descriptive analysis and quantitative aspects. Cuadernos De Gestión, 21(2), 19–34. https://doi.org/10.5295/cdg.191209lg
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Keywords
Life settlement, Life insurance, Life expectancy, Sensitivity analysis, Mortality multiplier
References
AA-Partners Ltd., 2017. AAP Life Settlement Valuation – Manual. Disponible en: https://www.aa-partners.ch/fileadmin/files/Valuation/
AAP_Life_Settlement_Valuation_-_Manual_V6.0.pdf [Acceso 06/10/2019].
AM Best Company, Inc. and/or its affiliates, 2016. Life Settlement Securitization. Disponible en: http://www3.ambest.com/ambv/ratingmethodology/OpenPDF.aspx?rc=197705. [Acceso 11/09/2019].
American Cancer Society, 2019. Tasas de supervivencia de los cánceres de laringe y de hipofaringe. Disponible en: https://www.cancer.org/es/cancer/cancer-de-laringe-e-hipofaringe/deteccion-diagnostico-clasificacion-por-etapas/tasas-de-supervivencia.html. [Acceso 04/09/2019].
Bajo, N., Mendoza, C. y Monjas, M., 2013. Portfolio Diversification with Life Settlements: An Empirical Analysis Applied to Mutual Funds.
The Geneva Papers on Risk and Insurance-Issues and Practice, 38 (1), 22-42. https://doi.org/10.1057/gpp.2012.44
Bauer, D., Fasano, M.V., Russ, J. y Zhu, N., 2017. Evaluating Life Expectancy Evaluations. North American Actuarial Journal, 22 (2), 198-
209. https://doi.org/10.1080/10920277.2017.1381031
Braun, A., Affolter, S. y Schmeiser, H., 2016. Life Settlement Funds: Current Valuation Practices and Areas for Improvement. Risk Management and Insurance Review, 19, 173-195. https://doi.org/10.1111/rmir.12042
Braun, A., Cohen, L., Malloy, C.J. y Xu, J., 2018. Saving Face: A Solution to the Hidden Crisis for Life Insurance Policyholders. Social Science Research Network (SSRN). http://dx.doi.org/10.2139/ssrn.3179334
Braun, A., Cohen, L.H., Malloy, C.J. y Xu, J., 2019. Introduction to life settlement. En Xu, J. Essays on the US Life Settlement Market. University of St. Gallen, 13-29. Disponible en: https://www1.unisg.ch/www/edis.nsf/SysLkpByIdentifier/4859/$FILE/dis4859.pdf [Acceso 14/09/2019]
Braun, A., Gatzert, N. y Schmeiser, H., 2012. Performance and Risks of Open‐End Life Settlement Funds. Journal of Risk and Insurance, 79 (1), 193-230. https://doi.org/10.1111/j.1539-6975.2011.01414.x
Braun, A. y Xu, J., 2019. Pricing life: risk premiums in the secondary insurance market. En Xu, J. Essays on the US Life Settlement Market. University of St. Gallen, 68-98. Disponible en: https://www1.unisg.ch/www/edis.nsf/SysLkpByIdentifier/4859/$FILE/dis4859.pdf [Acceso 14/09/2019]
Brockett, P.L., Chuang, S.-L., Deng, Y. y MacMinn, R.D., 2013. Incorporating longevity risk and medical information into life settlement
pricing. Journal of Risk and Insurance, 80 (3), 799-826. https://doi.org/10.1111/j.1539-6975.2013.01522.x
Cook, D. y Ezell, G., 2008. Life Settlement Characteristics and Mortality Experience for Two Providers. Milliman Research Report, Seattle.
Doherty, N.A. y Singer, H.J., 2003. The benefits of a secondary market for life insurance policies. Real Property, Probate and Trust Journal, 38, 449-478. Disponible en: https://www.jstor.org/stable/20785738. [Acceso 04/09/2019]
Dolan, V.F., 2019. Advantages of a Life Expectancy Using Life Insurance Underwriting and Life Settlement Methods in the Legal Setting.
Disponible en: https://www.experts.com/content/articles/Vera-Dolan-Life-Expectancy.pdf. [Acceso 04/08/2019].
Dowd, K., 2007. Measuring market risk. John Wiley & Sons, Chichester ELSA - European Life Settlement Association, 2019. Risks associated with life settlement holdings. Disponible en: https://www.elsa-sls.org/wp-content/uploads/pdf/sample-disclosure.pdf. [Acceso 09/09/2019].
Freedman, M. y Young, D., 2015. Life settlements: discover your client’s unknown asset. Presentation at the 6th Annual financial advisor
retirement symposium, April 1-2, Las Vegas. Disponible en: http://www.ceresaig.com/wp-content/uploads/2017/08/Life-Settlements-An-Unkown-Asset.pdf. [Acceso 01/09/2019]
Gatzert, N., 2010. The secondary market for life insurance in the United Kingdom, Germany, and the United States: Comparison and overview. Risk Management and Insurance Review, 13 (2), 279-301. https://doi.org/10.1111/j.1540-6296.2010.01187.x
Gatzert, N., Hoermann, G., y Schmeiser, H., 2009. The impact of the secondary market on life insurers’ surrender profits. Journal of Risk
and Insurance, 76 (4), 887-908. Disponible en: https://www.jstor.org/stable/20685278. [Acceso 07/07/2019]
Gerber, 1995. Life Insurance mathematics. Springer-Verlag. Berlin.
Giacalone, J. A., 2001. Analyzing an emerging industry: Viatical transactions and the secondary market for life insurance policies. Southern Business Review, Fall, 1-7.
Giaccotto, C., Golec, J. y Schmutz, B.P., 2015. Measuring the performance of the secondary market for life insurance policies. Journal
of Risk and Insurance, 84 (1), 127-151. https://doi.org/10.1111/jori.12078
Ho, T.S., 1992. Key rate durations: Measures of interest rate risks. TheJournal of Fixed Income, 2 (2), 29-44. https://doi.org/10.3905/jfi.1992.408049
Ingraham, H.G. y Salani, S.S., 2004. Life settlements as a viable option. Journal of Financial Service Professionals, 58 (5), 72-76.
Januário, A.V. y Naik, N.Y., 2013. Empirical investigation of life settlements: The secondary market for life insurance policies. Social Science Research Network (SSRN). http://dx.doi.org/10.2139/ssrn.2278299
Jori, M., Bosch M., Morillo, I. y Ribas C., 2010. Riesgo de inversión en Life Settlements. Análisis Financiero vol. 2, 113, 6-13. http://hdl.
handle.net/2445/117223
Li, J.S.H. y Luo, A., 2012. Key q-duration: A framework for hedging longevity risk. Astin Bulletin: The Journal of the IAA, 42 (2), 413-452.
https://doi.org/10.2143/AST.42.2.2182804
Lubovich, J., Sabes, J. y Siegert, P., 2008. Introduction to methodologies used to price life insurance policies in life settlement transactions. Social Science Research Network (SSRN). http://dx.doi.org/10.2139/ssrn.1567264
MacMinn, R.D. y Zhu, N., 2017. Hedging Longevity Risk in Life Settlements Using Biomedical Research‐Backed Obligations. Journal of Risk and Insurance, 84, 439-458. https://doi.org/10.1111/jori.12200
Mendoza, C. y Monjas, M., 2011. Análisis de viabilidad de mercados financieros de acuerdos de vida y de otros instrumentos vinculados a la esperanza de vida: una referencia al caso español. Revista Galega de Economía, 20 (2). 1-13.
Olivieri, A., 2006. Heterogeneity in survival models. Applications to pensions and life annuities. Belgian Actuarial Bulletin, 6 (1), 23-39.
Ortiz, C.E., Stone, C.A. y Zissu, A., 2008. Securitization of senior life settlements: managing interest rate risk with a planned duration class. Journal of Financial Transformation, 23 (9), 35-41.
Pitacco, E., 2019. Heterogeneity in mortality: a survey with an actuarial focus. European Actuarial Journal 9, (1) 3-30. https://doi.org/10.1007/s13385-019-00207-z
Rosenfeld, S., 2009. Life settlements: Signposts to a principal asset class. Wharton Financial Institution Centre, University of Pennsylvania. Disponible en: https://lifesettlementsfund.com/files/news/wharton_signposts_to_a_principal_asset_class_2009.pdf. [Acceso 03/09/2019]
Ruß, J., Bauer, D. y Zhu, N., 2018. Asymmetric Information in Secondary Insurance Markets: Evidence from the Life Settlement Market.
Presentation at the International Congress of Actuaries, June 4-8, Berlin.
Servicio de Estudios de MAPFRE, 2019. El mercado español de segurosen 2018. Fundación MAPFRE, Madrid. Disponible en: https://www.
fundacionmapfre.org/documentacion/publico/i18n/catalogo_imagenes/grupo.cmd?path=1099983. [Acceso 01/10//2019].
Stone, C. A. y Zissu, A., 2008. Using Life Extension-Duration and LifeExtension-Convexity to Value Senior Life Settlement Contracts.
The Journal of Alternative Investments, 11 (2), 94-108. https://doi.org/10.3905/jai.2008.712600
Tablas de Mortalidad de la Población Asegurada Española PASEM, 2010.Disponible en: http://www.unespa.es/que-hacemos/tablas-y-estadisticas/tablas-mortalidad-la-poblacion-asegurada-pasem2010/. [Acceso 03/06/2019].
The McGriff Alliance, 2018. Why life settlements make sense. Disponible en: https://www.themcgriffalliance.com/why-life-settlements-make-sense. [Acceso 20/09/2019].
Wang, J.L., Hsieh, M.-H. y Tsai, C., 2011. Using Life Settlements to Hedge the Mortality Risk of Life Insurers: An Asset-Liability Management Approach. Working Paper, Risk and Insurance Research Centre, Chengchi University. Disponible en: http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.457.877&rep=rep1&type=pdf. [Acceso 20/08/2019].
Wang, J.L., Huang, H.C., Yang, S.S. y Tsai, J.T., 2010. An optimal product mix for hedging longevity risk in life insurance companies: The immunization theory approach. Journal of Risk and Insurance 77 (2),473-497. https://doi.org/10.1111/j.1539-6975.2009.01325.x
Xu, J., 2019. Dating Death: An Empirical Comparison of Medical Underwriters in the US Life Settlements Market. North American Actuarial Journal. https://doi.org/10.1080/10920277.2019.1585881
Zollars, D., Grossfeld, S. y Day, D., 2003. The Art of the Deal: Pricing Life Settlements. Contingencies, January/February, 34-38.
AAP_Life_Settlement_Valuation_-_Manual_V6.0.pdf [Acceso 06/10/2019].
AM Best Company, Inc. and/or its affiliates, 2016. Life Settlement Securitization. Disponible en: http://www3.ambest.com/ambv/ratingmethodology/OpenPDF.aspx?rc=197705. [Acceso 11/09/2019].
American Cancer Society, 2019. Tasas de supervivencia de los cánceres de laringe y de hipofaringe. Disponible en: https://www.cancer.org/es/cancer/cancer-de-laringe-e-hipofaringe/deteccion-diagnostico-clasificacion-por-etapas/tasas-de-supervivencia.html. [Acceso 04/09/2019].
Bajo, N., Mendoza, C. y Monjas, M., 2013. Portfolio Diversification with Life Settlements: An Empirical Analysis Applied to Mutual Funds.
The Geneva Papers on Risk and Insurance-Issues and Practice, 38 (1), 22-42. https://doi.org/10.1057/gpp.2012.44
Bauer, D., Fasano, M.V., Russ, J. y Zhu, N., 2017. Evaluating Life Expectancy Evaluations. North American Actuarial Journal, 22 (2), 198-
209. https://doi.org/10.1080/10920277.2017.1381031
Braun, A., Affolter, S. y Schmeiser, H., 2016. Life Settlement Funds: Current Valuation Practices and Areas for Improvement. Risk Management and Insurance Review, 19, 173-195. https://doi.org/10.1111/rmir.12042
Braun, A., Cohen, L., Malloy, C.J. y Xu, J., 2018. Saving Face: A Solution to the Hidden Crisis for Life Insurance Policyholders. Social Science Research Network (SSRN). http://dx.doi.org/10.2139/ssrn.3179334
Braun, A., Cohen, L.H., Malloy, C.J. y Xu, J., 2019. Introduction to life settlement. En Xu, J. Essays on the US Life Settlement Market. University of St. Gallen, 13-29. Disponible en: https://www1.unisg.ch/www/edis.nsf/SysLkpByIdentifier/4859/$FILE/dis4859.pdf [Acceso 14/09/2019]
Braun, A., Gatzert, N. y Schmeiser, H., 2012. Performance and Risks of Open‐End Life Settlement Funds. Journal of Risk and Insurance, 79 (1), 193-230. https://doi.org/10.1111/j.1539-6975.2011.01414.x
Braun, A. y Xu, J., 2019. Pricing life: risk premiums in the secondary insurance market. En Xu, J. Essays on the US Life Settlement Market. University of St. Gallen, 68-98. Disponible en: https://www1.unisg.ch/www/edis.nsf/SysLkpByIdentifier/4859/$FILE/dis4859.pdf [Acceso 14/09/2019]
Brockett, P.L., Chuang, S.-L., Deng, Y. y MacMinn, R.D., 2013. Incorporating longevity risk and medical information into life settlement
pricing. Journal of Risk and Insurance, 80 (3), 799-826. https://doi.org/10.1111/j.1539-6975.2013.01522.x
Cook, D. y Ezell, G., 2008. Life Settlement Characteristics and Mortality Experience for Two Providers. Milliman Research Report, Seattle.
Doherty, N.A. y Singer, H.J., 2003. The benefits of a secondary market for life insurance policies. Real Property, Probate and Trust Journal, 38, 449-478. Disponible en: https://www.jstor.org/stable/20785738. [Acceso 04/09/2019]
Dolan, V.F., 2019. Advantages of a Life Expectancy Using Life Insurance Underwriting and Life Settlement Methods in the Legal Setting.
Disponible en: https://www.experts.com/content/articles/Vera-Dolan-Life-Expectancy.pdf. [Acceso 04/08/2019].
Dowd, K., 2007. Measuring market risk. John Wiley & Sons, Chichester ELSA - European Life Settlement Association, 2019. Risks associated with life settlement holdings. Disponible en: https://www.elsa-sls.org/wp-content/uploads/pdf/sample-disclosure.pdf. [Acceso 09/09/2019].
Freedman, M. y Young, D., 2015. Life settlements: discover your client’s unknown asset. Presentation at the 6th Annual financial advisor
retirement symposium, April 1-2, Las Vegas. Disponible en: http://www.ceresaig.com/wp-content/uploads/2017/08/Life-Settlements-An-Unkown-Asset.pdf. [Acceso 01/09/2019]
Gatzert, N., 2010. The secondary market for life insurance in the United Kingdom, Germany, and the United States: Comparison and overview. Risk Management and Insurance Review, 13 (2), 279-301. https://doi.org/10.1111/j.1540-6296.2010.01187.x
Gatzert, N., Hoermann, G., y Schmeiser, H., 2009. The impact of the secondary market on life insurers’ surrender profits. Journal of Risk
and Insurance, 76 (4), 887-908. Disponible en: https://www.jstor.org/stable/20685278. [Acceso 07/07/2019]
Gerber, 1995. Life Insurance mathematics. Springer-Verlag. Berlin.
Giacalone, J. A., 2001. Analyzing an emerging industry: Viatical transactions and the secondary market for life insurance policies. Southern Business Review, Fall, 1-7.
Giaccotto, C., Golec, J. y Schmutz, B.P., 2015. Measuring the performance of the secondary market for life insurance policies. Journal
of Risk and Insurance, 84 (1), 127-151. https://doi.org/10.1111/jori.12078
Ho, T.S., 1992. Key rate durations: Measures of interest rate risks. TheJournal of Fixed Income, 2 (2), 29-44. https://doi.org/10.3905/jfi.1992.408049
Ingraham, H.G. y Salani, S.S., 2004. Life settlements as a viable option. Journal of Financial Service Professionals, 58 (5), 72-76.
Januário, A.V. y Naik, N.Y., 2013. Empirical investigation of life settlements: The secondary market for life insurance policies. Social Science Research Network (SSRN). http://dx.doi.org/10.2139/ssrn.2278299
Jori, M., Bosch M., Morillo, I. y Ribas C., 2010. Riesgo de inversión en Life Settlements. Análisis Financiero vol. 2, 113, 6-13. http://hdl.
handle.net/2445/117223
Li, J.S.H. y Luo, A., 2012. Key q-duration: A framework for hedging longevity risk. Astin Bulletin: The Journal of the IAA, 42 (2), 413-452.
https://doi.org/10.2143/AST.42.2.2182804
Lubovich, J., Sabes, J. y Siegert, P., 2008. Introduction to methodologies used to price life insurance policies in life settlement transactions. Social Science Research Network (SSRN). http://dx.doi.org/10.2139/ssrn.1567264
MacMinn, R.D. y Zhu, N., 2017. Hedging Longevity Risk in Life Settlements Using Biomedical Research‐Backed Obligations. Journal of Risk and Insurance, 84, 439-458. https://doi.org/10.1111/jori.12200
Mendoza, C. y Monjas, M., 2011. Análisis de viabilidad de mercados financieros de acuerdos de vida y de otros instrumentos vinculados a la esperanza de vida: una referencia al caso español. Revista Galega de Economía, 20 (2). 1-13.
Olivieri, A., 2006. Heterogeneity in survival models. Applications to pensions and life annuities. Belgian Actuarial Bulletin, 6 (1), 23-39.
Ortiz, C.E., Stone, C.A. y Zissu, A., 2008. Securitization of senior life settlements: managing interest rate risk with a planned duration class. Journal of Financial Transformation, 23 (9), 35-41.
Pitacco, E., 2019. Heterogeneity in mortality: a survey with an actuarial focus. European Actuarial Journal 9, (1) 3-30. https://doi.org/10.1007/s13385-019-00207-z
Rosenfeld, S., 2009. Life settlements: Signposts to a principal asset class. Wharton Financial Institution Centre, University of Pennsylvania. Disponible en: https://lifesettlementsfund.com/files/news/wharton_signposts_to_a_principal_asset_class_2009.pdf. [Acceso 03/09/2019]
Ruß, J., Bauer, D. y Zhu, N., 2018. Asymmetric Information in Secondary Insurance Markets: Evidence from the Life Settlement Market.
Presentation at the International Congress of Actuaries, June 4-8, Berlin.
Servicio de Estudios de MAPFRE, 2019. El mercado español de segurosen 2018. Fundación MAPFRE, Madrid. Disponible en: https://www.
fundacionmapfre.org/documentacion/publico/i18n/catalogo_imagenes/grupo.cmd?path=1099983. [Acceso 01/10//2019].
Stone, C. A. y Zissu, A., 2008. Using Life Extension-Duration and LifeExtension-Convexity to Value Senior Life Settlement Contracts.
The Journal of Alternative Investments, 11 (2), 94-108. https://doi.org/10.3905/jai.2008.712600
Tablas de Mortalidad de la Población Asegurada Española PASEM, 2010.Disponible en: http://www.unespa.es/que-hacemos/tablas-y-estadisticas/tablas-mortalidad-la-poblacion-asegurada-pasem2010/. [Acceso 03/06/2019].
The McGriff Alliance, 2018. Why life settlements make sense. Disponible en: https://www.themcgriffalliance.com/why-life-settlements-make-sense. [Acceso 20/09/2019].
Wang, J.L., Hsieh, M.-H. y Tsai, C., 2011. Using Life Settlements to Hedge the Mortality Risk of Life Insurers: An Asset-Liability Management Approach. Working Paper, Risk and Insurance Research Centre, Chengchi University. Disponible en: http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.457.877&rep=rep1&type=pdf. [Acceso 20/08/2019].
Wang, J.L., Huang, H.C., Yang, S.S. y Tsai, J.T., 2010. An optimal product mix for hedging longevity risk in life insurance companies: The immunization theory approach. Journal of Risk and Insurance 77 (2),473-497. https://doi.org/10.1111/j.1539-6975.2009.01325.x
Xu, J., 2019. Dating Death: An Empirical Comparison of Medical Underwriters in the US Life Settlements Market. North American Actuarial Journal. https://doi.org/10.1080/10920277.2019.1585881
Zollars, D., Grossfeld, S. y Day, D., 2003. The Art of the Deal: Pricing Life Settlements. Contingencies, January/February, 34-38.
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