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Life Settlement Funds: Current Valuation Practices and Areas for Improvement

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  • Alexander Braun
  • Sarah Affolter
  • Hato Schmeiser

Abstract

We analyze the prevailing valuation practices in the life settlement industry based on a sample of 11 funds that cover a large portion of the current market. The most striking result is that a majority of asset managers seem to substantially overvalue their portfolios relative to the prices of comparable transactions that have recently been closed. Drawing on market‐consistent estimates with regard to medical underwriting, it is possible to trace back the observed discrepancies to inadequately low model inputs for life expectancies and discount rates. The main consequences are a dissimilar treatment of investor groups in open‐end funds structures as well as an unduly high compensation for managers and third parties. To address this predicament, we suggest defining life settlements as level 2 assets in the fair value hierarchy of IFRS 13, improving transparency and disclosure requirements, and developing new incentive‐compatible fee schedules.

Suggested Citation

  • Alexander Braun & Sarah Affolter & Hato Schmeiser, 2016. "Life Settlement Funds: Current Valuation Practices and Areas for Improvement," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 19(2), pages 173-195, September.
    • Handle: RePEc:bla:rmgtin:v:19:y:2016:i:2:p:173-195
    DOI: 10.1111/rmir.12042
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    References listed on IDEAS

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    1. Hanming Fang & Edward Kung, 2010. "How Does Life Settlement Affect the Primary Life Insurance Market?," NBER Working Papers 15761, National Bureau of Economic Research, Inc.
    2. Nadine Gatzert, 2010. "The Secondary Market for Life Insurance in the United Kingdom, Germany, and the United States: Comparison and Overview," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 13(2), pages 279-301, September.
    3. Nadine Gatzert & Gudrun Hoermann & Hato Schmeiser, 2009. "The Impact of the Secondary Market on Life Insurers’ Surrender Profits," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 76(4), pages 887-908, December.
    4. Nuria Bajo Davó & Carmen Mendoza Resco & Manuel Monjas Barroso, 2013. "Portfolio Diversification with Life Settlements: An Empirical Analysis Applied to Mutual Funds," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 38(1), pages 22-42, January.
    5. Hugo Nurnberg & Douglas Lackey, 2010. "The Ethics of Life Insurance Settlements: Investing in the Lives of Unrelated Individuals," Journal of Business Ethics, Springer, vol. 96(4), pages 513-534, November.
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    Cited by:

    1. Beer, Simone & Braun, Alexander & Marugg, Andrin, 2019. "Pricing industry loss warranties in a Lévy–Frailty framework," Insurance: Mathematics and Economics, Elsevier, vol. 89(C), pages 171-181.
    2. Jorge Andrés-Sánchez & Laura González-Vila Puchades & Mario Arias-Oliva, 2023. "Factors influencing policyholders' acceptance of life settlements: a technology acceptance model," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 48(4), pages 941-967, October.

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