MFOHome About Commentary Discussions Funds The Best Resources Support Us!

Howdy, Stranger!

It looks like you're new here. If you want to get involved, click one of these buttons!

Sign In Register

Categories

In this Discussion

Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.

    Support MFO

  • Donate through PayPal

Life settlement securitization. Next weapon of financial destruction?

cman
edited May 2014 in Off-Topic
This was a brief news item that just came in about an Australian life insurer that caught my eye (as any financial industry problems do).

Suncorp plans writedown of life insurance business

This seemed a bit odd because life insurance companies typically don't lose money unless there is an epidemic of death. If anything, life expectancy is increasing bringing more premiums and more lapsing policies. If people let their policies lapse, then the premiums paid so far are pure profit for the insurer. So, it is recession proof.

I decided to dig a bit deeper and what I am reading about these things called life settlements is scaring the heck out of me. Wondering if this news is just the tip of the iceberg.

Life settlement companies buy up your life insurance for less than the death benefit, pay the premiums until you die and collect the death benefit. People who need immediate cash or can no longer afford premiums can benefit. Seems benign so far.

But these life settlements have been securitized and sold to an unknown number of entities and they are not registered with SEC. Now, it starts to resemble the risks created by mortgage securitization.

Insurance companies determine their premiums based on assumptions about policies lapsing. With Life Settlements less policies lapse and it appears that insurance companies have not priced this in, resulting in losses.

The securitization is bringing in more money for settlements just like for mortgages. This means, more policies being securitized and so less policies lapsing and so increased losses for insurers.

If an insurer fails, there is unknown amount of risk from the failures of these settlement securities and some insurance companies themselves might be buying these increasing the systemic risk in the industry.

Hopefully, insurance industry will reset the premiums to higher before they face problems so the worst case scenario is that life insurance premiums start going up for all. But if a weak insurer cannot do so because of competition and goes under ...

This is not as big a market as mortgage securitization yet but the lack of regulation and transparency in this area is extremely disturbing. There don't seem to be mutual funds or ETFs that are just for these securities but they may be held by some ETFs and funds as part of their portfolio. No one seems to know where all the risk is embedded.

The risks have been dismissed but we have seen that movie before.

If I was Paulson, I would go to Goldman Sachs and ask them to create an instrument to bet against these securities, but GS won't take my call.:-)

Comments

  • BrianW
    Whereas I'm not a fan of 'big Government', I am a fan of responsible regulation. This reminds of the kind of stuff reviewed in the Frontline documentary 'The Warning'. In this documentary, Brooksly Born repeated attempted to warn and regulate CDOs. She believed there was systemic risk in the market that threatened to impact the financial system. She was ignored, ostracized and her department destroyed. Till this day, the CFTC can no longer regulate CDO's. Will we ever learn?
Sign In or Register to comment.