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Wall Street's New Idea: Betting on Life Insurance Policies
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Alan Hague



Joined: 05 Sep 2008
Posts: 621
Location: http://askthedead.bandcamp.com
Wall Street's New Idea: Betting on Life Insurance Policies  Reply with quote  

Just in case we needed any more proof that Wall Street is a bunch of vampires.

Wall Street Pursues Profit in Bundles of Life Insurance
By JENNY ANDERSON
Published: September 5, 2009

After the mortgage business imploded last year, Wall Street investment banks began searching for another big idea to make money. They think they may have found one.

The bankers plan to buy “life settlements,” life insurance policies that ill and elderly people sell for cash — $400,000 for a $1 million policy, say, depending on the life expectancy of the insured person. Then they plan to “securitize” these policies, in Wall Street jargon, by packaging hundreds or thousands together into bonds. They will then resell those bonds to investors, like big pension funds, who will receive the payouts when people with the insurance die.

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. But some who have studied life settlements warn that insurers might have to raise premiums in the short term if they end up having to pay out more death claims than they had anticipated.

The idea is still in the planning stages. But already “our phones have been ringing off the hook with inquiries,” says Kathleen Tillwitz, a senior vice president at DBRS, which gives risk ratings to investments and is reviewing nine proposals for life-insurance securitizations from private investors and financial firms, including Credit Suisse.

“We’re hoping to get a herd stampeding after the first offering,” said one investment banker not authorized to speak to the news media...

* The rest of the article is here:

http://www.nytimes.com/2009/09/06/business/06insurance.html?pagewanted=1&_r=1&th&emc=th [url][/url]
Post Sun Sep 06, 2009 11:37 am
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T-Wrex
p00ny tang


Joined: 30 Jun 2002
Posts: 6405
Location: Detroit, Michigan
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I'm putting my life savings into this market before the swine flu hits...
...and the heatwave of 2010.

I'm going to be rich!

I love America.
Post Sun Sep 06, 2009 12:35 pm
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TurnpikeGates



Joined: 30 Jun 2003
Posts: 517
Location: Bay Area
Re: Wall Street's New Idea: Betting on Life Insurance Polici  Reply with quote  

Alan Hague wrote:
But some who have studied life settlements warn that insurers might have to raise premiums in the short term if they end up having to pay out more death claims than they had anticipated.




Ok, I don't quite get this... In a vacuum, this shouldn't effect the insurers at all. They would be separate from this process. There are two explanations for this sentence that I can fathom, and one of them is a bit sickening: 1) it's saying that a ton more people would buy life insurance policy than already do, in order to play in this game, thus more payouts, but that doesn't really make sense because in the SHORT TERM, more money would be coming in to them... or 2) (the one that makes me angry) - life insurance companies right now count on not paying out many claims, but they know powerful investors would actually enforce and demand the claims.
Post Mon Sep 07, 2009 1:42 am
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Captiv8



Joined: 25 Aug 2006
Posts: 8547
Location: Third Coast
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Life continues to sicken me.
Post Mon Sep 07, 2009 10:06 am
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Alan Hague



Joined: 05 Sep 2008
Posts: 621
Location: http://askthedead.bandcamp.com
Re: Wall Street's New Idea: Betting on Life Insurance Polici  Reply with quote  

TurnpikeGates wrote:
Alan Hague wrote:
But some who have studied life settlements warn that insurers might have to raise premiums in the short term if they end up having to pay out more death claims than they had anticipated.




Ok, I don't quite get this... In a vacuum, this shouldn't effect the insurers at all. They would be separate from this process. There are two explanations for this sentence that I can fathom, and one of them is a bit sickening: 1) it's saying that a ton more people would buy life insurance policy than already do, in order to play in this game, thus more payouts, but that doesn't really make sense because in the SHORT TERM, more money would be coming in to them... or 2) (the one that makes me angry) - life insurance companies right now count on not paying out many claims, but they know powerful investors would actually enforce and demand the claims.


Also from the article:

"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.

“When they set their premiums they were basing them on assumptions that were wrong,” said Neil A. Doherty, a professor at Wharton who has studied life settlements.

Indeed, Mr. Doherty says that in reaction to widespread securitization, insurers most likely would have to raise the premiums on new life policies."

The weird part to me is how any claim on the insurance policy would still depend on the death of the original insurance recipient EVEN THOUGH it's already been purchased by an investor. I'm kind of amazed (but not entirely surprised) there aren't laws against that kind of thing from happening.
Post Tue Sep 08, 2009 11:16 am
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