Mon, 05/10/2009 - 11:59
The European Life Settlement Association has spoken out against recent media speculation that life settlements are tipped to become the new vogue for securitization, following the failure of ill-fated US mortgage-backed products.
Reports have suggested that credit reference agencies have been inundated with requests to review various life insurance based packaged securities, yet the major banks remain tight-lipped.
Others have suggested that life settlements will disrupt the primary life insurance market as insurers depend on a level of lapsed or surrendered policies.
Life settlements are US life insurance backed investments, and relate to unwanted policies which have been sold by the policy seller to a financial institution in exchange for a cash sum. These policies relate to individuals over the age of 65 with an anticipated life expectancy of less than 15 years.
The ELSA says making comparisons with the subprime debacle is inaccurate as the mispricing of mortgage-backed securities in the credit crisis related to their high level of market risk. By contrast, life settlements are subject to little to no market risk as the return is dependent on the life insurance policy maturing on the policyholder’s death. The volatile performance from equities and other traditional assets has made non-correlation highly desirable for portfolio diversification for investors – especially pension funds – burnt by poor investment performance in the financial crisis
The association says these uncorrelated returns can provide a regular income stream for investors that is not subject to the traditional investment cycle – an invaluable characteristic from the perspective of both pension funds and investors
In addition, it says life settlement regulation takes place at a State, not Federal, level in the US. Regulatory interest is growing, with the Securities and Exchange Commission now setting up a taskforce to look into the asset class.
Andrew Wilkins, executive director at Catalyst Investment Group, who represents the needs of retail investors within ELSA, says: “Drawing a parallel between life settlements and the mispricing nightmare surrounding subprime mortgage-backed securities is without justification. You only have to look at the misery facing regular savers who have been burnt by the stock market and are struggling to find any kind of return on their cash to realise that they need more options.
“By investing in life settlements structures, retail investors can opt for capital growth or income-generating products which will not be affected by economic woes and aim to deliver much smoother returns for the long run. Knowing exactly when to move in and out of more volatile investment classes is beyond many an able fund manager, so what chance does the end-investor have? Now is the time for a healthy debate on the benefits and risks of life settlements, and for IFAs to engage in that discussion so investors have access to quality investments they understand and can trust.”
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