Life settlements is a potentially
profitable alternative for sophisticated investors, particularly
those seeking an asset class uncorrelated to capital markets,
believes Ryan Bisch, a senior associate at consultancy Mercer’s
Alternatives Boutique in Melbourne, Australia.
“The global financial crisis was a
wake-up call for many investors who realised that traditional
alternative assets, such as hedge fund of funds, had failed to
provide investors with adequate strategy diversification,” said
Bisch. “Life settlements provide a genuine alternative because they
are based on bearing longevity risk as well as exploiting
structural inefficiencies in the life insurance market, rather than
mainstream capital market risk premia.”
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Bisch noted that deal-flow in the
life settlement market grew from an estimated $5.5bn in 2005 to
$11.7bn in 2008 before dropping sharply to $8bn in 2009.
“There were several factors behind
the decline in demand, including the difficulty of raising capital
during the downturn, the after-effects of extensions of life
expectancies in late 2008, and competition from new asset classes,”
said Bisch.
He continued that Mercer expects
that the market will rebound during 2010 and is likely produce
volumes closer to 2008 levels.
Though Birch believes life
settlements will continue to grow, he advised investors to be
cautious in what is an asset class untested in a mainstream
institutional investor context.
“Investors need to be cognisant that with this type of strategy
they are bearing longevity risk,” said Bisch. Understanding the
intricacies of this risk is critical, and for many institutional
investors already exposed to the risk of mortality improvement,
such as defined benefit pension schemes, life settlements may not
in fact be appropriate.”
