It was announced on May 15, 2009 that the Treasury Department is prepared to inject up to $22 billion under the Troubled Asset Relief Program (TARP) to a number of U.S. life insurers, including Hartford, Prudential, Principal, Lincoln, Allstate, and Ameriprise.  This is troublesome for the economic efficiency argument outlined in my article, “The Next Revolution for Investment in Capital Markets:  Taking Away Beta-Risk with Life Settlement Portfolios.”  It would now appear that the idea Warren Buffet and the life insurance industry had of creating a Beta-risk free investment with life settlement policies is subject to just that amount of Beta-risk which $22 billion has been quantified to remedy.  If a life insurer goes bankrupt, by definition, the prospect of fully paying beneficiaries is called into question.  The “Buffet plan” for addressing Beta-risk has failed just as it was making a more noticeable presence in the capital market.  The undeniable and non-diversifiable power of Beta-risk remains.

This said the likelihood it is the life insurance side of things that has brought about the unusual circumstances of a solid and respectable industry sticking its hand out for government relief is minimal.  Provided a large enough sample of those taking life insurance policies exists, like the number of spins in roulette, a certain and predictable association results between pay-ins and pay-outs.  In the history of life insurance, those less able at actuarial forecasting or managing cash flow have always found relief within their own industry, with larger, better managed companies taking over the policies of those less able, thereby preserving the integrity of the death claim-death payment contract.  There is no reason to suspect this would not continue today.  Life insurance policies do not suddenly become unprofitable.  It is more likely the $22 billion of TARP has to do with the life insurance industry’s involvement in the insurability of mortgage and credit defaults than with its foundation of life insurance policies.  In that respect, the efficiency of life settlement investments outlined in my article remains valid, even if I must acknowledge the existence of some Beta-risk left owing to other-than-life-insurance involvement within the industry itself.

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Life Settlement Investment Study section