Captive Insight Vol I | Page 32

CAPTIVEINSIGHT

LIFE SETTLEMENTS
AN EMERGING
ASSET CLASS

Alan Morris
Chief Actuary, Cayman
Islands Monetary Authority

- Overview and Perspective

image © godfather - Fotolia.com

Over the recent past, the volatility, turmoil
and consequently the inherent uncertainty
in financial markets has encouraged
if not forced investors to explore new
ways of understanding risk. As a natural
consequence, new classes of assets have
emerged providing opportunities to effectively
help manage key risk considerations. The
continued development and evolution
of the life settlements market is in large
part attributable to this industry focus on
risk mitigation.

The life settlement space is an area of increasing
interest for Cayman insurance licensees, who are using
this structure to innovate in the following ways:

1
2
3
4

H
 EDGING ACTIVITY
– assuming longevity risk acts as a natural hedge to mortality
risk that they may have on their books
D
 IRECT INVESTMENT
– purchase of life settlements to hold as an asset providing low
volatility, good returns and diversification
R
 EINSURANCE ACTIVITY
– reinsurance arrangements covering longevity risk, premium
requirements or actual vs. expected cash flows

S
 WAPS
– longevity / mortality swaps with other industry participants

32

A life settlement is the purchase of a life insurance policy
from the current owner, in most cases for purposes of
investment or to provide hedging opportunities. The policy
is purchased at a significant discount to the face value and at
a market value which offers an attractive expected return to
the purchaser. The market price is higher than the illustrated
cash value, thus presenting an attractive sale price to the
seller as well. Subsequent to acquisition, the purchaser, who
is now the owner of the policy is entitled to the benefits
under the contract upon the death of the insured, but is also
responsible for the payment of any required premiums.
An increasing population base in the target market of age 65
and older due to the maturation of the baby boom generation,
increased market awareness of the life settlement industry,
development of a stronger broker network and enhanced
industry communication have contributed to the increased
interest in life settlements.
The attractiveness of an investment in life settlements arises
from the absolute return, which is the excess of the future
death benefit received under the policy over the price paid to
acquire the contract, the required premium payments over the
remaining future lifetime of the insured life and any expenses
required to maintain the policy and monitor the health and
the life status of the insured. In addition there is a recognised
diversification benefit that is largely due to human mortality
being independent of traditional financial risk, which is
attributable to general economic conditions and specific
influence