ironphoenix (ironphoenix) wrote,

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Here we go again!

Remember those securitized subprime mortgages?

Well, here's a contender for the Next Big Thing: securitized life settlements.

The core idea (from the linked article) is this:
The bankers plan to buy “life settlements,” life insurance policies that ill and elderly people sell for cash — $400,000 for a $1 million policy, say, depending on the life expectancy of the insured person. Then they plan to “securitize” these policies, in Wall Street jargon, by packaging hundreds or thousands together into bonds. They will then resell those bonds to investors, like big pension funds, who will receive the payouts when people with the insurance die.

The earlier the policyholder dies, the bigger the return — though if people live longer than expected, investors could get poor returns or even lose money.
There are a few significant problems with this.

First, and most frightening, there is now a business case to be made for shortening people's lifespans, as if corporations and individuals haven't shown themselves willing to do some pretty dirty things (preferably using cat's paws) already to augment their profits. The conflict of interests this can raise is not reassuring. Insider trading can take an even more sinister turn, too.

Even without the incentive to stack the deck, this would be problematic: insurance companies will have to roll this into their calculations for premiums, and I think it will push the cost of insurance up. I predict that we'll start seeing non-transferability options in insurance contracts, with pre-specified cashout benefits if customers are savvy enough to demand them, in exchange for a discount on premiums.

The NY Times article emphasizes the risk that overall life expectancy increases could cause highly correlated losses on these investments, which could in turn precipitate another financial collapse: the bankers are tossing around numbers like $500 billion, and if an appreciable part of that abruptly goes missing, the collateral crisis of late '08 could jump right back out again.

In any case, as a rule, when money is being made, it's a good idea to ask where the value is coming from. In this case, it's being cored out out the profits of insurance companies, and you can bet that they won't take it lying down. It'll be interesting to see how the regulatory agencies handle this one!
Tags: economics
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