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Life expectancy - one size does not fit all
By Louise Witts, Senior
Actuary, SL Investment Management
One of the key attractions of investing in Life Settlements is
that the return achieved is linked to the Life Expectancy of
insurance policyholders, which is something uncorrelated to
mainstream investment markets. An obvious consequence of this is
that one of the corner stones of a successful Life Settlement fund
is the manager's approach to Life Expectancy and mortality, which
are key factors in pricing a Life Settlement policy.
When a policyholder brings a policy into the secondary market,
typically the intermediary will obtain an estimate of their Life
Expectancy (LE) from one or more specialist LE Providers.
This helps the potential investors to assess whether or not
the policy is one which will fit in their portfolio and match the
risk/reward profile of their fund. The LE becomes a vital
piece of information in the pricing of the Life Settlement and it
is worth considering how it is used.
Currently, the standard mortality table used across the market
for pricing Life Settlements is the 2008 Valuation Basic Table
("2008VBT") issued by the Society of Actuaries. SL uses the
gender- and smoker-specific 2008VBT mortality tables as a basis for
pricing, in conjunction with corresponding gender-specific
mortality improvement factors derived from those used by the
Society of Actuaries in the 2008VBT report.
SL's pricing methodology is to adjust these underlying 2008VBT
mortality rates (combined with mortality improvement factors) by
applying a mortality factor unique to each life insured. The
mortality factor is calculated such that the actuarial LE derived
from the adjusted mortality rates is equal to an average of the LEs
obtained from the LE Providers. The adjusted mortality rates
result in a unique mortality curve for each life insured, which
takes account of their relative impairment compared with the
The bottom line is that it is difficult to encapsulate all the
information on a policyholder in a single LE number. It takes a
robust and sophisticated actuarial team to steer through the LE
maze and some fund managers simply do not have the resources to go
that extra mile.