Life settlements and longevity structures

Shifts in global markets have made investors look harder for holdings that move independently of stocks and bonds. Life settlements, in which existing life insurance policies are bought from their holders, are presented here as one such option, with the promise of returns that are both substantial and steady. Written for readers at any stage of expertise, the book walks through how a portfolio of these policies is assembled and run, how longevity, interest rate and credit risks are evaluated, modelled and reduced, and which financing and risk management arrangements can be built around them.

The discussion opens with the origins of life insurance and explains how growing demand for alternative funding sources contributed to the development of the American life settlements market. A more technical section sets out the formulas used to construct mortality curves and compares the instruments used in credit derivatives with those that can be applied to longevity risk. Structured products and securitisation are then introduced, beginning with straightforward vanilla instruments and their models before moving to the investment structures that involve life settlements.

Later chapters describe the capital market tools that help investors contain the risks of a life settlement portfolio, and the ways such a portfolio can offset risks found in traditional markets. The final part examines derivative products, existing or still under discussion, that could reduce or remove longevity risk from these portfolios, then reviews hedging and risk management methods and how their success can be gauged.