Americans who sold their unwanted life insurance policies collectively received more than four times the amount they would have received had they surrendered them to their life insurance companies, according to a study of more than 9,000 life insurance policies.
The study of insurance policies with an aggregate death benefit in excess of USD24bn was presented by Professor Narayan Naik (pictured) at an event at London Business School.
Naik says: “The evidence suggests that the life settlement market has helped significantly in enhancing the welfare of policy-owners who, instead of surrendering, sold their life insurance policies in the secondary market.”
The study also found that the average expected return for investors purchasing the large sample of life settlements was 12.5 per cent per annum, which was 8.4 per cent in excess of treasury yields. During recent years, the study found that the average expected return had risen substantially to 18.3 per cent per annum in 2011, some 15.9 per cent in excess of treasury yields.
As the expected return depends critically on the life expectancy of the insured, the independent and comprehensive study conducted sensitivity analysis. It found that even if you assumed life expectancy estimates had been understated by three years, investors purchasing this sample of life settlements could still have expected a positive return of 3.2 per cent per annum.
Given the expected return and the fact that longevity risk is largely uncorrelated with other financial markets, Naik concludes: “The life settlement option appears to be an interesting investment opportunity for institutional investors willing to include longevity risk in their portfolio and to commit capital for the medium term.”
The study also highlighted that the additional source of tax revenue the market provides to the government could potentially be used to fund socially beneficial welfare programmes such as Medicaid and Medicare.
The research has been welcomed by the European Life Settlement Association (ELSA).
Simon Erritt, chair, ELSA, says: “ELSA welcomes this ground breaking research and the spirit of transparency and openness that lies behind it, and believes that further collaboration between the market and the academic community will help cement the industry’s growing reputation as a socially-responsible and financially-compelling alternative to traditional investment asset classes.”