Outlook for life settlement funds in 2024
March 2024 | TALKINGPOINT | FINANCE & INVESTMENT
Financier Worldwide Magazine
March 2024 Issue
FW discusses the outlook for life settlement funds in 2024 with Corwin Zass and Brian Forman at Actuarial Risk Management.
FW: What are your thoughts on the expanding list of vendors providing life expectancy estimates?
Zass: Without a true mortality study that could only be created with the cooperation of life expectancy (LE) underwriters, comparisons of different vendors is difficult, and any study results are not uniform in construction. Suppose a new entrant promises ‘a different means of underwriting’ that is ‘more accurate’. Unless it was based on formulaic rules of available historical data points to produce a profile of the remaining lifespan, there is no forward-looking approach to validate its methods and accuracy. The concern is that it will take many years to evaluate whether these newer entrants have – unknowing or even knowing – bias toward shorter LEs. History repeats itself and we could find ourselves back to a situation where investors cannot trust the projected industry results. Unfortunately, only time will tell, and we therefore offer a word of caution.
FW: Alongside the rise in 10-year US treasuries, to what extent are we likely to see a comparable increase in the discount rates used in life settlement valuations?
Forman: In a perfect world we would see general trends and not spikes in interest rates. We have seen relatively rapid increases in interest rates, but now they have settled back a bit. It is a tough job to determine the long-term impact from short-term data. If everything stays stable at this point, we should see some small increases over the long term, but expect any such increases to occur slowly due to market forces. Whether or not US treasuries remain stable is an entirely different question. In the meantime, we would expect to see more pressure for opportunistic purchases at values. Remember, life settlement risk-adjusted returns inherently include exposure to longevity risk. This longevity risk should not change due to changes in the risk-free rates. So, rises in treasuries must drive increases in life settlement discount rates too, otherwise an investor becomes less incentivised to stay in this space.
“Rises in treasuries must drive increases in life settlement discount rates too, otherwise an investor becomes less incentivised to stay in this space.”
FW: Against a backdrop of increasing life expectancy, what are your thoughts on the possible impact of long COVID-19 and the appropriate level of mortality improvement on life settlement valuations?
Zass: Recent data has clearly called into question the mortality improvement assumptions of a few years ago. It is difficult to spot long-term trends within a relatively short historical period. Nonetheless, we expect that mortality improvement will resume its course in the coming years, but we also understand the pressure to reduce the more recent improvement factors by some percentage for valuations at this point in time. Furthermore, mortality improvement is clearly supportable and not uniform across ages or gender.
FW: After 20 years of life settlement industry growth, debate continues over what the real mortality rates should be for life settlement valuation. What might be done to create a more transparent view of mortality rates used in the life settlement industry?
Forman: Without trying to sound like a broken record, what might be done is to obtain real mortality experience for the life settlement industry. Unfortunately, whether that is practical or likely is a different story. Unless the industry gravitates to some type of standardisation, there are long-term risks that investors will tire of the debate. It may take something like one of the industry organisations sponsoring some type of standard comparison metric that could be produced along with an LE. It continues to be a challenge for market participants to understand why LEs may differ significantly by life settlement underwriter. It would be easier if there was a metric that indicated what percentage of a standard life settlement mortality table the LE represents. That would allow something that users could utilise to ask themselves if such a percentage makes sense.
FW: To what extent are deals in the life settlements space often based on different perceptions of the status of the policies themselves? How might the industry move toward a more orderly marketplace with less divergent views among participants?
Zass: There is always a question as to the quality and completeness of the data and whether a buyer sees all past LEs or just the ones that a seller wants them to see. Any established and orderly marketplace is facilitated by data, so the key is to create less concern about the data being utilised. Artificial intelligence (AI) technologies are being explored to evaluate mortality expectations within certain cohorts of the life settlement population.
“There is always a question as to the quality and completeness of the data and whether a buyer sees all past LEs or just the ones that a seller wants them to see.”
FW: To what extent is it possible to shorten the time to close a deal in the life settlement market?
Forman: We need to separate the drivers of the current length of time from initial communication to closing, which generally falls into underwriting efforts versus legal due diligence. The legal side has many focuses, including evaluating the risk that the insurance company could baulk at paying the claim. One investor is reportedly using AI to diligence policy forms, which will shorten the timeline. On the underwriting side, so long as there is a need to use medical records and the like, the timeline is longer. As technological advances increase, there will come a time where almost immediate electronic profiles, including the health and lifestyle of an insured, will be available. This marrying of data and technology is the panacea to longer closing timelines.
FW: Following a decades-long slide, do you believe we will finally see life settlement securitisation?
Zass: With interest rates rising above near zero short term government yields, there is an argument that it is easier to do an asset-backed security with a pool of life settlements being the driver of repayment. It comes back to setting expectations and how the asset-backed security is constructed, and what facilities or methods might help de-risk the exposures that rating agencies are concerned about.
Corwin Zass provides Actuarial Risk Management with both strategic direction and technical expertise. As a trained life actuary for close to 30 years, he has advised on topics such as M&A, product & risk management, capital strategy and financial reporting paradigms. Mr Zass and his team regularly advise global clients on mortality, morbidity and other risk matters important to those participating or investing in the insurance space either directly or indirectly, including life and structured settlements. He can be contacted on +1 (512) 345 5200or by email: czass@actrisk.com.
Brian Forman leverages his knowledge of life insurance companies and their products to provide a deep understanding of the risks and pitfalls of investing in life settlements as well as the benefits. He has developed and refined the Actuarial Risk Management model that provides life settlement analysis, and his 14 years as senior consulting actuary with the firm are an important component of his 43 years of actuarial experience. He can be contacted on +1 (512) 345 5200 or by email: bforman@actrisk.com.
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