How Do Life Settlement Providers Accommodate Longevity Risk?
The major risk an investor (institutional or non-institutional) faces when investing in a life insurance policy or a portfolio of policies is what is known as longevity risk or the risk of policy maturity extending longer than expected. A longer than expected maturity on a life insurance policy lowers the rate of return on investment. Other risks to an investor like lapse risk (missing a premium payment causing a policy to lapse) are virtually non-existent due to portfolio servicing and administrative providers and the internal controls they employ.
In the infancy of the life settlement industry, institutional investors would insure against longevity risk by purchasing insurance. For a substantial premium to a specialty insurer like Lloyd’s of London, an investor would be compensated in full if the insured lived beyond two years of his underwritten life expectancy. This was necessary because at the beginning of the secondary market, insufficient data existed (life expectancy to actual) to support the estimates of life expectancy providers. Investors wanted an additional layer of protection in case these estimates proved to be significantly short of actual. After a few years and with increasing comfort levels with life expectancy providers, the purchase of longevity risk insurance disappeared, and with it, an improvement in policy pricing.
Today, longevity risk is mitigated by portfolio diversification. Portfolios of life insurance policies are diversified by age, sex, life expectancy, policy type, policy size, carrier, and morbidity (disease factor). This gives pricing flexibility to an institutional investor who may be very interested in a seller’s policy if it meets the investment criteria to “slot” the policy into the portfolio. This would explain the wide variances from investors bidding on any particular policy. As the old saying goes “one man’s junk is another man’s treasure”. Individual investors need to be very concerned about longevity risk particularly if investment dollars are concentrated in just one or even a few policies.
Located in Manhattan Beach, California, Opulen Capital is a specialized financial services firm focusing on products and services tailored for senior citizens. Opulen Capital is one of the leading firms offering Life Settlement opportunities for high net worth clientele. We leverage unrivaled experience and exclusive relationships in the life settlement marketplace to structure, obtain, and sell life insurance products to maximize cash profits for our valued clients. Opulen Capital’s mission is to continue to provide the best solutions for our clients through the highest level of integrity and service. For more information, visit our website at http://www.OpulenCapital.com or call Opulen at 877-OPULEN-1 (877-678-5361)
