Managing a Portfolio of Life Settlement Policies

Date of Completion

January 2012


Applied Mathematics|Economics, Finance




The secondary market for life insurance has demonstrated spectacular growth in the past few decades. Although the market has observed less funding since the most recent economic crisis and there have been fewer players in the market during the economic recovery, there are still new participants who are poised to enter the secondary market. One of the many reasons is that the performance of this asset class is less correlated with the equity market. As most already know, the current form of the market has many inefficiencies, such as high transaction fees, tax disadvantages, and poor control of underwriting risks etc. This research explains the economics behind the policy purchase and focuses on improving the efficiency in the management of a life insurance portfolio in the secondary market, and in turn improving the liquidity and desirability of this asset class. A dynamic valuation technique is proposed in this research which produces a more stable earning pattern. The mortality unlocking approach used in the proposed dynamic valuation also serves as the basis for a proposed reinsurance strategy which can be used to improve the tail risk protection for a portfolio. The proposed reinsurance strategy is designed to help reinsurers better control the longevity risk and allows reinsurers to provide coverage at an affordable price. ^