Wall Street banks, beaten down by the financial crisis, and propped up by government bailout money are looking to get their securitization machines humming again. USING LIFE INSURANCE POLICIES.
Personally, I find this repulsive, ghoulish, and possibly dangerous.
Thanks to all who commented. This is an interesting debate brought to us by the Wonderful People Who Brought Us the Recession. Death Bonds. Death Derivatives. Whatever.
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.
Either way, Wall Street would profit by pocketing sizable fees for creating the bonds, reselling them and subsequently trading them.
http://www.nytimes.com/...
Call Congress and the SEC to end this brain child NOW, before it launches. Life and death should never be something Wall Street gets to gamble on.
And if Wall Street dices up and securitizes life insurance policies, like they did with mortgages, who will be responsible to pay a Life Insurance claim? Could we see life insurance bankruptcies erupt at the very time the boomers claims become due?
How many ways could seniors be manipulated to die sooner? How many would have to die to insure a large return? Appalling as these questions are, I believe they must be asked.
Indeed, what is good for Wall Street could be bad for the insurance industry, and perhaps for customers, too. That is because policyholders often let their life insurance lapse before they die, for a variety of reasons — their children grow up and no longer need the financial protection, or the premiums become too expensive. When that happens, the insurer does not have to make a payout.
But if a policy is purchased and packaged into a security, investors will keep paying the premiums that might have been abandoned; as a result, more policies will stay in force, ensuring more payouts over time and less money for the insurance companies.
ibid, nytimes
DISCUSSION AND CONCLUSIONS
There is a growing demand for a long-term hedge against improving annuity mortality. We have shown how innovation in swaps and bond contracts can provide new securities which can provide the hedge insurers need.
http://www.allbusiness.com/...
Swaps
The same cash flows, [B.sub.t] to the insurer and [D.sub.t] to the bondholders, can be arranged with swap agreements and no principal payment at time T.
ibid, allbusiness.com
Yes, there will be Hedge Funds that will make new fortunes Betting on our Lives!
HOW GOOD IS THE HEDGE?
We point out that, given the distribution of survivors, there is very little variance in the cash flows.
ibid, allbusiness
I have a hard time seeing the words Hedge and Swap used when the product is a life insurance policy.
Our life span and death date will be packaged in swaps and insurers offering bonds to investors.
It is deja vu Mortgage Default Swaps, only lives, not homes will be the foundation for the Wall Street traders. But, you can't reposses a life!
MetLife could be the next IndyBank if I understand this Wall Street scheme to bet on our very lives.
For a list of failed banks you can go here. They failed because of the Wall Street Housing Bubble:
http://www.fdic.gov/...
If you are not repulsed yet, perhaps you don't quite understand the potential here. This example might help raise your ire and concern:
Tricky Predictions - I
In addition to fraud, there is another potential risk for investors: that some people could live far longer than expected.
It is not just a hypothetical risk. That is what happened in the 1980s, when new treatments prolonged the life of AIDS patients. Investors who bought their policies on the expectation that the most victims would die within two years ended up losing money.
Or this:
Tricky Predictions - II
That is because if too many people with leukemia are in the securitization portfolio, and a cure is developed, the value of the bond would plummet.
ibid, nytimes
The designers even have some reservations:
Thus, we see how to set up a longevity risk bond contract for which the longevity risk over T years is passed to the capital market almost completely. Of course, the price of the mortality bond is yet to be addressed. And we need to see how likely it is that some payments will be covered. That is, how good is the insurance coverage? Or from the investor's perspective, how likely is it that they will miss a coupon?
ibid, allbusiness
There are critics. I find this reassuring.
The elderly will be offered a "life settlement" not unlike reverse mortgages. A pay out at a much lower return than the policy value the consumer signed up and paid for, sometimes for decades. Once the life settlement is paid to the insured, the investors own the policy and its eventual benefit payment at the full value of the policy, their profit.
Critics of life settlements believe “this defeats the idea of what life insurance is supposed to be,” said Steven Weisbart, senior vice president and chief economist for the Insurance Information Institute, a trade group. “It’s not an investment product, a gambling product.”
In 2006, while he was New York attorney general, Eliot Spitzer sued Coventry, one of the largest life settlement companies, accusing it of engaging in bid-rigging with rivals to keep down prices offered to people who wanted to sell their policies. The case is continuing.
“Predators in the life settlement market have the motive, means and, if left unchecked by legislators and regulators and by their own community, the opportunity to take advantage of seniors,” Stephan Leimberg, co-author of a book on life settlements, testified at a Senate Special Committee on Aging last April.
http://www.nytimes.com/...
Once a large pool of policies are purchased by investors via "life settlement" payments to the original insureds, they can be bundled, swapped, insured, hedged, and all the other creative mechanisms that were applied to mortgages. Hence, the potential for a future Life Insurance Bubble bursting.
Betting on our lives will help Wall Street recover from their housing losses. Really? And Congress is going to allow this?
But even if a small fraction of policy holders do sell them, some in the industry predict the market could reach $500 billion. That would help Wall Street offset the loss of revenue from the collapse of the United States residential mortgage securities market, to $169 billion so far this year from a peak of $941 billion in 2005, according to Dealogic, a firm that tracks financial data.
ibid, nytimes
Hedging on Whether We Live or Die. Can anyone else see our risk at the hands of these gamblers?
Goldman Sachs has developed a tradable index of life settlements, enabling investors to bet on whether people will live longer than expected or die sooner than planned. The index is similar to tradable stock market indices that allow investors to bet on the overall direction of the market without buying stocks.
Spokesmen for Goldman Sachs refused to comment.
ibid, nytimes
Mathematicians to the Rescue, AGAIN. Quant models will be used.
Spreading the Risk
To help understand how to manage these risks, Ms. Tillwitz and her colleague Jan Buckler — a mathematics whiz with a Ph.D. in nuclear engineering — traveled the world visiting firms that handle life settlements. “We do not want to rate a deal that blows up,” Ms. Tillwitz said.
The solution? A bond made up of life settlements would ideally have policies from people with a range of diseases — leukemia, lung cancer, heart disease, breast cancer, diabetes, Alzheimer’s. That is because if too many people with leukemia are in the securitization portfolio, and a cure is developed, the value of the bond would plummet.
ibid, nytimes
THE NEXT BUBBLE: Gambling on Our Lives and Deaths
btw, it is estimated that, if this is launched, the cost for life insurance will increase, too. Like houses did!
Also, it sounds like this may be done already with our property insurance.
This is the same reaction investors have had to the so-called "catastrophe bonds" based on portfolios of property insurance
.
ibid, allbusiness
Could this help explain the problems of payouts when one area experiences huge losses due to a castastrophe?
Presently
The only pure mortality deal is the Swiss Re mortality bond issued in December 2003.
MorganStanley's announcement describes this as a 1 in 25 year event (MorganStanley, 2003)
.
ibid, allbusines
MAKE CONGRESS AND THE SEC STOP THIS HEINOUS PLAN to allow the Banksters bet on our lives.
