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.”
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.”