Bundling Life Insurance Policies

[yeahwho]

That's right! Bundling Life Insurance Policies (http://www.nytimes.com/2009/09/06/business/06insurance.html?scp=2&sq=life%20insurance&st=cse).

I was reading this article the other day and at first I thought to myself "No Way" but as I continued on to the third paragraph it became obvious that "Yes" there is a fucking way and Wall Street has decided to buy up Life Insurance premiums in the hopes those who sell them will die sooner than later.

Go figure? This Country has gone greed mad!

I love the responses, as usual the NYTimes reader's (http://community.nytimes.com/comments/www.nytimes.com/2009/09/06/business/06insurance.html?sort=recommended)have succinctly captured Wall Street's madness.

Shut down Wall Street. Now. And keep it shut for a very long time.

This new push by Wall Street for yet another category to securitize proves beyond a shadow of a doubt that the speculators and the investment banks that cater to them are beyond hope, beyond redemption, beyond what should be allowed.

This is either the next debacle for investors and the financial system, or the next bailout to be funded by taxpayers, or, more likely, both.

But the risk to this country doesn't end there, additional dangers even more extreme threaten. The article correctly notes that collapse of a financial product (and, indeed, the entire financial system) can occur because of the violation of assumptions, and such violation could apply to longevity. While such violations of assumptions might occur naturally (i.e. a pandemic), or through discovery (a disease cure), not addressed is the potential for investors with a stake in longevity to deliberately attempt to alter public longevity. Some such investors would have financial motive to oppose health care improvements, and might do so, sabotaging research, cures, or political reform of heath care availability. In the most extreme manifestation of manipulation, rogue investors might deliberately engage in acts of "health terrorism", introducing pandemics for their financial gain.

Speculation in longevity should not be allowed. Congress and the executive branch, do your job. (And that job isn't supposed to be protecting Wall Street).

[yeahwho]

There has been very little traction on this action currently underway, even with Health Insurance being in the headlines for months hardly a blip on the radar how this current idea is coming along.

Michael Moore mentioned it on Jay Leno's new show last night, but mostly it's trade industry rags just tidying up the planned purchase and resale of life insurance premiums.

Such as this from the National Underwriter Life & Health Insurance Agents journal, this is their attempt to poo poo the NYTimes for slanting resale life insurance premiums as being beyond the pale.

LISA Pans Article (http://www.lifeandhealthinsurancenews.com/News/2009/9/Pages/LISA-Pans-Article.aspx)

The point of life settlements is to provide older Americans with the opportunity to profit from policies they no longer want or need “at significantly better market values than they would have received by simply surrendering the policy,” Head writes.

lol, plus speculate that you die sooner than later, fuck me running.

[HAL 9000]

This is an interesting issue. The concept of securitising an income stream is not particularly exotic in itself (the exotic nature of certain mortgage backed securities comes from the packaging and repacking of the products and the opaque nature of supporting insurance arrangements and rating scores).

And the whole Life Insurance/Assurance industry is about speculation on life expectancy. That is what these companies do and it is what allows them to price risk effectively and offer efficient rates to consumers (at least in theory and assuming no fundamental market failure). There is nothing immoral about that activity.

Is it wrong to buy a bond that’s return is linked to life expectancy? I don’t have a problem with it, and it could be a good hedge product to buy for a company whose returns are adversely impacted by improved mortality. But I guess I can see the concern - imagine if Pharmaceuticals bought them to hedge the risk associated with one of their products causing mass death!

Is it wrong to buy shares in a Life Insurance company (bearing in mind the share price will also be a function of life expectancy)? I guess it is the same thing from an ethical stand point.

For me, the big issue is - is it fair that new policyholders are subsidising the inflated returns that will be received by old policyholders who can now sell their policy for a better price? It is hard to feel critical of a scheme that allows an elderly person who is unable to meet their premium to extract a value greater than the surrender rate. But it also seems unfair that new policyholders need to subsidise that.

When Life Expectancy improves above actuarial expectations – a similar thing happens, current customers win and insurers (and therefore new customers) lose (mortality risk – the risk that people live too long is one of the biggest issues that insurers face).

So I guess I don’t care about the securitisation (it sounds like a potentially good bond which could be beneficial to society through its risk mitigation effect) – but I would worry that some policyholders wont get treated fairly.

I have a friend who is a Life Actuary, I will let you know if she has any views on this.

[yeahwho]

On the surface do you not think it is insane to speculate on life expectancies? What happens when the "securitized life insurance" bubble bursts?

I'm just amazed that you're not seeing how low the bar is being set here. Wall Street basically swindled the planet with trumped up hedge funds and securities for the past decade (longer than that actually it's just all coming home to roost).

Here is a quick synopsis of my take on what has happened with these absolute criminals who stop at nothing,

1. Lobby until lawmakers de-regulate loans to a point even the mob's shylock's can't compete

2. Even with a full on triple debt economy continue to overhype the value of every product on the security and exchanges.

3. As our country is attacked and subsequently sent to two wars sell every minimum wage employee a house and a car.

4. Knowingly going bankrupt and destroying the economy, continue squeezing every dime out of every fellow citizen in the name of the corporate good.

5. Collapse as planned and with new laws (and political allies) in place, make the government fleece it's citizens through every paycheck in the form of federal income tax.

6. Don't stop being creative, you've robbed them straight with trumped up bullshit securities/loans for at least a decade, you now rob them legally right up the ass of each paycheck, may as will have them pay you when they're dead. Hopefully dead sooner than later.

There's your Death Panels.

[HAL 9000]

I don’t think it is insane to speculate on life expectancy indeed speculation on life expectancy is a vital part of every economy in the world. Obviously it the core activity of the Life Insurance industry but it is also central to the activities of public policymakers, healthcare providers, pensions companies etc.

It would be a logical fallacy to assume that because one class of assets suffered a bubble that others will. That does not mean it can’t happen one the conclusion does not follow from the premise.

This particular asset does not seem so likely to be liable to bubbles compared to others but I would agree that a risk does exist. Thinking about a comparison with mortgage backed securities. MBS are secured on houses whose values are highly subjective while there is an uncertain credit risk from both the homeowner community and the monoline insurers. There was also a problem of agents misrepresenting the quality of the mortgages.

Finally there was a credit boom created by the banks sudden increase in money supply (from selling the securities)

Thinking about a life insurance bond, its underlying asset value is much less volatile as it is based entirely on average life expectancy which is much more predictable than house price. Meanwhile, the credit risk exposure is to large insurance companies rather than homeowners (to be honest that may not be much of an improvement ).

I would imagine a key issue is how likely it is that agents would misrepresent the value of the asset – i.e. would insurance sales people, lie and say that policyholders are less healthy than they really are (like they lied and said home buyers were more solvent than they were) – it seems doubtful, insurance brokers will generate more volume by overstating the health of the customer as this will reduce the premiums and increase volumes (I would imagine – don’t know the industry well enough to be sure).

Overall, I would suppose that this product would be less of a danger than an MBS but of course not risk-less. I also think that your anger at the finance industry is justified – but lets not characterise the whole lot as some evil conspiracy, most of it is full of hard working and honest people like you or I who are performing a vital function for society

When the industry works well it means risks are priced efficiently and investment can drive the advancement of society. When it works badly it create bubbles and risk/return mismatches. The key to providing that critical role (transforming risks and maturities) is having clever products which match investors risk profiles – products like this can make that happen as long as controls are appropriate and the market is well regulated.

So (in my view) products like this are not a problem, it could benefit society if the governance, disclosure and regulatory framework is right – and it is that framework that needs the publics focus rather bashing the industry and it workers (IMO). I can certainly see where your coming from though.

[yeahwho]

The key to providing that critical role (transforming risks and maturities) is having clever products which match investors risk profiles – products like this can make that happen as long as controls are appropriate and the market is well regulated.

So (in my view) products like this are not a problem, it could benefit society if the governance, disclosure and regulatory framework is right – and it is that framework that needs the publics focus rather bashing the industry and it workers (IMO). I can certainly see where your coming from though.

I am not suspect of everything that happens on Wall Street, but this is one of those items I am highly suspect of. They've run out of ideas to speculate on making wealth as far as speculating on the positivity of life, such as good health (pharmaceuticals/health insurance), homes (mortgages) and bonds for our future infrastructure... good things they drove into the ground without shame.

Instead it is a scheme of death futures. Am I right? If your broke and your going to die, help out the economy by selling off your beneficiaries chance at the economy. Let the speculators jump all over it. explain to me again, how does a scheme of this type benefit society?

These same people just put us into trillion dollar debt. They have no morals. This is insane to me. Fuck just call it a day Wall Street and take the losses. They have destroyed our Country slowly but surely the past 3 decades. Greedy fucks.

[HAL 9000]

Instead it is a scheme of death futures. Am I right? If your broke and your going to die, help out the economy by selling off your beneficiaries chance at the economy. Let the speculators jump all over it. explain to me again, how does a scheme of this type benefit society?


No that’s not quite right – it is more about policyholders selling their policies in situations where they would otherwise be entitled to nothing or much less.Noone is forcing them to sell a policy if they still want it.

It could benefit society in two main ways.

Firstly, at present, elderly customers who cannot pay their insurance premiums can either allow the policy to lapse (so they receive nothing and have wasted their premiums) or they can surrender their policy and receive a small fraction of their premiums back. Certain types of insurance policy can be traded on a second hand market - so you can get more than the surrender value by selling your policy to a third party. This is a 100 year old market and concerns people selling policies they no longer want or can afford and getting back more than the underlying surrender value – good news for the customers. Also note this is an old practice, the new part is the securitization rather than the speculation on life expectancy.

So when a company offers to buy an elderly persons policy for more than the surrender value – that is good for the elderly person – they get more money than they otherwise would. If it were not so, then they would have no incentive to sell the policy and would simply surrender it. So that is the most obvious benefit.

The other benefit is to the financial system – a product like this would have a fairly unique property of gaining value as average life expectancy decreases. It is unlikely to be aimed at speculators (presumably sitting in their lair under a volcano and cackling as they contemplate the early deaths of the elderly) instead it is of more obvious benefit to a company that is inherently exposed to the risk that life expectancy will reduce. For example a company manufacturing mobility products for the elderly (or a chain of Bingo Halls also pharmaceuticals), a reduction in life expectancy might be a major risk for such a company and they can mitigate that risk by purchasing one of these bonds. Reduction of unnecessary risk = more efficient returns.

The point of the finance sector is to transform risks and allow unnecessary risks to be mitigated or diversified. This increases investment and innovation and drives economic growth. If properly run, this looks like a useful product – improperly run and you could get the bubbles and bankruptcies associated with the MBSs. But this is true of almost all financial products. Hence the need for the regulation and governance.


It is a baby and bathwater situation. Economies need efficient pricing of risk in order to grow. But weak controls bring in market failures because humans are inherently greedy. That is why it is important that we demand these controls and regulations from our governments. The last 20 years saw a political movement away from regulation and it was a move backed by the public (at least in the western economies). We have seen the consequence of that an must learn that critical lesson and never let it happen again.

Also think about this – the article has highlighted that this bond could threaten insurance companies because they presently assume a certain proportion of customers will let their policy lapse – and now this is less likely to happen. How fucked is that – insurance companies are betting that elderly people will ruin their policy by forgetting to pay or because they don’t realise they have a surrender option or because they realise they never should have bought the policy in the first place. They are speculating that their customers will make bad decisions and waste huge sums of money! This bond would reduce that and punish those insurers for their unfair business practices and that seems like a good thing to me – you can bet insurance mis-selling would reduce.

[yeahwho]

Also think about this – the article has highlighted that this bond could threaten insurance companies because they presently assume a certain proportion of customers will let their policy lapse – and now this is less likely to happen. How fucked is that – insurance companies are betting that elderly people will ruin their policy by forgetting to pay or because they don’t realise they have a surrender option or because they realise they never should have bought the policy in the first place. They are speculating that their customers will make bad decisions and waste huge sums of money! This bond would reduce that and punish those insurers for their unfair business practices and that seems like a good thing to me – you can bet insurance mis-selling would reduce.

I agree with this last paragraph with one caveat, in no way, shape or form should the only way to force and regulate the Life Insurance Industry to adhere to fair business practices be the re-selling of a personal policy. That is putting the cart in front of the horse.

And this is where I find the whole idea horrid. I'm not going to go over much of what has been covered here, because... well because I've already taken a stance just on moral and ethical values.

My stance is also on a very finite documented failure of Wall Street to put "Greed" aside. Take these Subprime Failure causes (http://en.wikipedia.org/wiki/Subprime_mortgage_crisis#Causes) and appliy them to Life Insurance Bundling. Why? Because nothing has changed on the street.

I just drive down to work and view the pawnshops, the checks cashed shops and now the debt consolidation shops and realize this is just a cash opportunity, not a fix.

[yeahwho]

Things are progressing along, Mary Schapiro, chairperson of the U.S. Securities and Exchange Commission is Aggressively Reviewing Insurance Securities (http://www.bloomberg.com/apps/news?pid=20601087&sid=alCpWhGVrhKk).

This is one of the bolder moves to come along even pre the 2008 tanking of the US economy. It's a story that should be followed closely.