Life Settlement Market and Sensitivity Analysis of Valuation
Date Issued
2005
Date
2005
Author(s)
Chen, Yu-Yueh
DOI
zh-TW
Abstract
The emergence of life settlement had broken the long-existed monopoly status of life insurance companies in the secondary market for life insurance policies. Through a life settlement transaction, the insured could sell his policy for an amount greater than the surrender value of the policy and then use the money to satisfy the need for cash or to fund new financial planning, the settlement provider could charge a commission on the deal, and the investor(s) could get the difference between the face amount of the policy and the settlement amount. It seems that all participants will benefit from the deal; however, there still have lots of problems in this market. Firstly, there are no complete description of the product structure and associated risks. Moreover, the settlement pricing model is opaque. Finally, the accuracy of life expectancy is suspicious. This article begins by analyzing life settlement market, product structure and associated risks. Next, based on a theoretical probabilistic model, the article investigates the impacts of settlement pricing factors, life expectancy misevaluation and mortality improvement to every participant in this market. The results show that life expectancy and discount rate play critical roles on the evaluation of life settlement; policy premium level is influential in life settlement pricing; age of insured and credit rating of life insurance companies are nearly no effect. Finally, the article evaluates the influences of life expectancy misevaluation on life settlement securitization products by analyzing real-world products. The magnitude of influences depends on the securitization structure. When the money invested is smaller than the total face amount in the asset pool, life expectancy misevaluation do impact investors’ rate of return. On the contrary, there is no effect on the investors’ rate of return when the money invested is equal to the total face amount in the asset pool. All the gains or losses caused by life expectancy misevaluation are absorbed by the residual class.
Subjects
保單貼現
敏感度分析
保單次級市場
life settlement
sensitivity analysis
life insurance second market
SDGs
Type
thesis
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