Life settlement is the ultimate diverse asset

Kathleen Brooks
ONE of the steps to fund management nirvana is ensuring that your portfolio is fully diversified. And after the financial crisis, the life settlements market could be the perfect uncorrelated asset.

The market works like so: people – typically who reside in the US – sell their life insurance policies to the secondary market, which are then bought by institutional investors. These investors take on the obligation for paying the premiums to the insurance company, and receive a payout once the original policyholder dies.

It’s essentially a bet on mortality rates, and the market is growing in Europe: according to the European Life Settlement Association (ELSA) the market is worth €9.5bn, and major participants include pension funds and family offices.

Betting on mortality rates might be considered morbid by some, but as Michael Crane from Coventry, a firm which pioneered the secondary life settlements market in the US and has a 50 per cent share of the overall market, says that typically his firm is doing the holder a favour when they purchase their policy: “We are paying people upfront for something they don’t want anymore.”

The typical life insurance policy purchased by Coventry pays out $3-$3.5m and is held by a high net worth individual in their 70s. So investors can breath a sigh of relief that they won’t be taking policies off senior citizens who don’t know what they are doing. Returns on life settlements can be in the low teens, which is extremely attractive while cash rates remain close to zero. “This market tends to be low leverage, low fees and there isn’t any securitisation,” Crane adds. This could be the perfect tonic for institutional investors who were burnt during the financial crisis.

Equity markets crashing shouldn’t affect people dying in Florida, explains Olivier Durand, an actuary in Deloitte’s actuarial insurance team. “This lowly-correlated asset class makes it very powerful,” he adds. The potential for growth is also very large, as the chart shows.

However, Durand says that the complexity of the secondary market can put people off: “It needs a robust operation to make sure that it works well. Firstly you have to identify the policy holder, transfer the policy, then manage it.” He also points out that the biggest danger is medical advances: “If people start to die later then that will impact returns.”

While there is, inevitably, a morbid element to this market, investors should consider that people only sell policies if they want to, returns are excellent, especially in the current market conditions, and correlations with other asset classes remain low.