Longevity-Mortality Markets

General Background

Defining Longevity/Mortality Risk: Review

Mortality Risk is the risk that an individual or group lives shorter than expected

  • Holders of Mortality Risk are those who are economically exposed should a group die too quickly (or benefit from less-than-expected mortality)
    • Insurance Carriers collect premium and forestall payment of death benefits until the death of the insured
    • Reinsurers often take on this risk, ceded by insurers
  • Longevity Risk is the risk that an individual or group lives longer than expected
  • Holders of Longevity Risk are those who are economically exposed to an extension in lifespan (and benefit from above-expected mortality)
    • Pension Funds continue to pay out benefits until the death of their beneficiaries
    • Annuity Writers make annuity payments until the death of the annuitant
    • The Social Security Trust Fund is the largest known pool of longevity risk
    • Life Settlement Investors purchase policies and pay premiums to keep policies in force, with longevity being the key variable affecting the investor’s IRR

Industry Overview

  • Longevity-Mortality risk is uncorrelated with established asset classes
    • Interest rates, equity performance, credit risk, macroeconomic trends
  • ILMA believes that the size of underlying insurance and pension exposure lends structural support for the establishment of the market as a standalone asset class
    • At the end of 2008 it was estimated that $26.1 trillion of ordinary life insurance (including term, universal, and whole life insurance) was in force*

Factors Affecting
Longevity/Mortality of a Population
— Developments in medical technology
— Access to high quality healthcare
— Health and habits of population

Factors correlated with
Longevity/Mortality of a Population
— Personal wealth***
—Geographical location
— Year of birth (“cohort”)

*Conning Research & Consulting Strategic Study Series – Life Settlements: A Buyer’s Market for Now 2009

The Life Settlement Market

A life settlement involves the sale of a life insurance policy by its owner or insured to a third party. The seller receives a one-time lump-sum payment for an amount greater than the policy’s cash surrender value and the buyer becomes the owner or beneficiary of the policy. Upon the insured’s death, the death benefit is paid to the current owner of the policy.

In 2008 approximately $12 billion worth of U.S. life insurance face values were settled.*

Many states regulate the secondary sale of existing life insurance policies and many other states are considering its regulation. ILMA is an active participant in advancing the regulation and transparency of the life settlement market.

*Conning Research & Consulting Strategic Study Series – Life Settlements: A Buyer’s Market for Now 2009

Premium Financing

Premium financing is the lending of funds to an individual, trust, or company to pay the premiums on a life insurance policy. The financing of life insurance policies has existed for several decades and the industry is experiencing significant growth as individuals increasingly look to finance policies as opposed to paying their premiums upfront or over time. Growth also has been generated by the development of a robust secondary market for life insurance policies which generate a market value for life insurance policies, enabling them to be accepted as collateral to lenders.

In general, loans to finance life insurance policies are collateralized by the policies themselves, either through their cash surrender value or market value, and additional collateral is typically required such as personal guarantees, cash, letters of credit, or other assets, depending upon the lender.