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Scarcity of Short-Life-Expectancy Policies Makes Ramping Up Portfolios Challenging
(BestWire Services Via Acquire Media NewsEdge) Accumulating a sizable pool of life settlement policies in a timely fashion for securitization remains a growing challenge due to the limited supply of policies with short life expectancies, experts say.
This limited number means the period it takes to build a portfolio or the ramp-up period could be extremely long and costly for the investor, said Emmanuel Modu, managing director and global head of structured finance at A.M. Best Co.
?All things being equal, it?s better to have 1,000 policies than 500 policies in the pool for securitization. But the problem with that is it could take up to a year or two years to actually get those numbers," Modu said during an online discussion on issues in life settlement securitization.
Modu said because of intense competition between investors for policies with low life expectancies, the hit ratio, which is the number of policies won, versus what?s on sale on the market could often be as low as 1% to 3%.
According to an A.M. Best methodology on life settlements, released in March, about 8% of individuals offering their insurance policies for sale have life expectancies of six years or less as determined by medical examiners.
The competition for these highly valuable policies is fierce even as more individuals choose to sell their life insurance policies.
J. Alan Jensen, an attorney with Seattle-based law firm Holland & Knight, said these individuals are motivated by a number of factors, including poor policy performance, rising cost, and sometimes divorce.
?We?re not going to see an elimination of the estate tax, so liquidity needs in larger estates will remain,? said Jensen, who provided an update on legal issues surrounding the life settlement market.
While many are motivated to sell, finding a buyer could be a little tricky, he said.
?You?re going to have a current decline in health. You go through a second underwriting at the time of sale, and if there?s maintenance of good health or [your] health improves, there may not be a buyer,? Jensen said.
Obviously, the most attractive life policies are ones involving gravely ill insureds. The age of the insured is a big factor also, he said.
Some experts say the competitive pressure in the life settlement market is what caused medical examiners to offer mortality ratings and life expectancies that were recently found to be longer than first projected.
The effect of life expectancy adverse development on a life settlement portfolio return can be dramatic. Recently, A.M. Best compared life expectancies issued by three major medical examiners over the past year, on the exact same 909 lives, and found that the largest difference of average life expectancies issued by any two medical examiners was 24 months. The smallest difference was eight months.
In the case of a 24-month difference, the return goes from 12.4% to 6.5% ? cutting the original internal rate of return nearly in half, the report states (BestWire, March 31, 2008).
(By David Dankwa, senior associate editor, BestWeek: David.Dankwa@ambest.com)
Copyright ? 2008 A.M. Best Company, Inc.
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