According to Sarah Hills of Reuters, Life settlements not as risky the subprime industry.
Although Life settlements are a type of life insurance-backed security, should not be compared to the failed subprime-backed products that presaged the global financial crisis. In recent weeks several sources have speculated that life settlements will be the next craze in securitisation, prompting comparisons with the disastrous securitisations of subprime mortgages in the United States.
But the European Life Settlement Association (ELSA), established in May to promote the 9.5 billion euro ($13.89 billion) asset class, said in a statement that comparisons with subprime were unwarranted because life settlements are not subject to the same macroeconomic and market forces.
“Suggesting life settlements are the new subprime scandal is simply an exercise in sensationalism by the media,” said Patrick McAdams, Co-Chairman of ELSA and Investment Director at Surrenda-link Investment Management.
“There are risks in life settlements, principally relating to life expectancy, potential advances in healthcare, and liquidity to pay premiums.
“However, these can be well managed through rigorous actuarial modelling of returns, highly diversified fund portfolios in terms of profile and geography of policy, and conservative fund management,” he added.
Life settlement securities are backed by U.S. life insurance policies that have been sold by the policyholders for a cash sum to a financial institution, which then hopes to profit from the policy payout once the life assured dies.
These policies relate to individuals over the age of 65 with an anticipated life expectancy of less than 15 years.
ELSA also said regulatory interest in life settlements was growing, further enhancing their attractiveness to investors, with the U.S. Securities and Exchange Commission (SEC) now setting up a taskforce to look into the asset class.
Last month, lawmakers and regulators in the U.S. expressed caution about the burgeoning business of pooling, repackaging and selling life insurance policies into securities that can be sold to investors.
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