How is a life expectancy estimated in a life settlement transaction? Traditionally, this service has been performed by suitably qualified, registered underwriting specialists. They are given full access to current details of the insured life including current medical records and lifestyle information. Similarly, this is the process used by the insurance company when pricing and accepting the business originally.
Accurate evaluation and realised performance depend on the careful estimation of life expectancy at purchase. It would make sense then, that the key to a solid foundation of investment in life settlements begins with an effective underwriting process in a life expectancy calculation.
As the asset class matures and grows these processes will evolve to increase efficiency for investors. The most commonly discussed topics, at present, are focused on the valuation of the life insurance policy, life expectancy estimates, and poor early performance. However, recently the focus has also been toward the growth in small-face life settlements transactions. A previously unventured market due to the costs and lengthy phase associated with acquisition processes and life expectancy calculations.
Recently a few industry members have sought to shake up the asset class. They aim to introduce alternative low-cost methods to life expectancy calculation by simplifying the process. Let’s look at some of these emerging methods.
One industry member is looking at supplementing their life expectancy reporting with the use of DNA methylation-based cellular testing. Reportedly, human cells record biological aging based on DNA methylation. This has great potential as a supplement to traditional methods to increase the accuracy of the calculation. However, it is meeting with some resistance from policy sellers as typically the insured life is quite elderly.
The idea that the biological age can be determined by someone’s face is also an innovative idea being considered. We aren’t aware if anyone has introduced the use of this method, in the life settlements market. But it’s a novel thought that face age correlates with biological age. Which may be true for excessive use of alcohol or smokers but what about faces that genetically look younger.
Whilst some industry members are expanding their methods of estimating life expectancy, for the policies they purchase, others are simplifying their methods. Some members are looking at introducing a questionnaire to replace the more formal process. Therefore, this would reduce the acquisition costs for the buyer. It seems best used to purchase a large volume of “small” insured policies. Whilst this may be useful in situations where medical records are unavailable or outdated the buyer is sacrificing knowledge and accuracy on the individual life. This approach brings into light the ability of the buyer to consistently discern any ‘half-truths’ reported by the insured. Some insured may overstate or understate their medical conditions to improve the sale of their life policy. The life insurance industry regards an unsupervised questionnaire as the least reliable source of information.
New methods for estimating life expectancies are continually being explored. However, the traditional methods for pricing policies will remain essential in mortality estimates for the foreseeable future. This traditional process, which includes access to full medical records, is still effective for most policies.
This is particularly true for large-face policies. Evidently, in these cases, both parties are seeking uncompromised data to initiate a ‘fair value’ for the policy. Life expectancy remains the most important piece of information in determining the price of a policy in the market. However, new lower-cost methods for measuring life expectancy can make the market for small-face policies more viable. This initiates more possibilities for both sellers and buyers. Only time will tell how successful the small-face policy market will be.
Given that most buyers are institutional investors, they are seeking a more sophisticated process to obtain the most accurate outcome. These methods are good in theory. However, they should act as a supplement to increase accuracy and should not be treated as an alternative method. You need to remember, Life Expectancy (LE) calculations are exactly that, an estimate. They offer a range of possible outcomes based on a historical mortality experience. In the end, human longevity estimates are both an art and a science. Only time will tell if these new and innovative methods prove useful.
As always we wish you well with your life settlement investment opportunities and if you want to learn more about investing in this asset class please contact us.
About Global Insurance Settlements Funds PLC (GISF)
Global Insurance Settlements Funds PLC (GISF) is an umbrella type investment company with segregated liability between sub-funds. The fund is incorporated in Ireland. The first sub-fund launched, GIS General Fund (the Fund), is listed on the Irish Stock Exchange.
This structure is aimed at Sophisticated / Institutional investors. Additionally, it provides tax clarity by ensuring there is no tax leakage. It enables a number of different investment options to suit the specific needs of our investors.
The Fund’s core activity is to actively manage a large and diverse portfolio of life insurance policies (life settlements). Policies are sourced by licensed U.S. Provider companies. The Board of GISF selects those that best meet the Fund’s policy purchase criteria.
Disclaimer: This information is intended for qualifying investors only. It was correct at the time of preparation. It has been prepared to provide general information only and should not be considered as a “securities recommendation” or an “invitation to invest” in any jurisdiction. Potential investors should consider the relevance of this information to their particular circumstances. Before proceeding, investors must obtain the prospectus and take their own legal and taxation advice. If you acquire or hold one of our products we will receive fees and other benefits as disclosed in the prospectus and relevant offering documents.