Extract from a Life Settlement Report article posted on September 18, 2008
An article in the Life Settlements Report explains that a leading life expectancy underwriter decided to lengthen its mortality tables without warning and surprised market participants who scrambled to keep deals alive.
‘It is definitely causing deals not to be done, some providers are standing by deals. Some are not.’ One life settlement broker was quoted as saying.
Minneapolis-based 21st Services announced during two heavily attended webinars on Sept. 10 and 11 that the changes to its mortality tables would take effect Sept. 16, giving brokers, providers and funders little time to react.
Life expectancy estimates provided by 21st and its competitors are used to help project the length of time an insured is expected to live and thus how a policy should be priced. Underwriters base the life expectancy estimate on a policyholder’s medical records. The number of year a policyholder is expected to love is used to project how much must be paid in premiums before the policy pays out to investors.
Although the impact of the 21st decision is causing pain in the short term, market participants predict that it will help in the long run because it will give investors more confidence in the settlement markets. As the estimates provided by the various life expectancy underwriters come within a closer range, some of the investors’ uncertainty will be alleviated, markets observers said.
‘I am heartened that there’s more convergence in terms of LE’s’ said Emmanuel Modu, managing director and global head of structured finance for insurance rating firm A.M Best. ‘I think it will help the industry because a lot of investors were concerned about the widely divergent life expectancies.
Steve Walker, chief operating officer and founder of 21st Services, said the company revised its mortality charts based in part on new information in the 2008 Valuation Basic Table (VBT), released in February by the Society of Actuaries to help insurers price policies. The changes to the 21st’s charts were also based on its own experience and advice from actuarial consultants inside and outside the company. Walker said.
‘We know that this causes upheaval’ Walker said. ‘We don’t take this lightly’
But he said that this was the only responsible step his company could take give then new information.
‘It will broaden the market’ in the long run, Walker said. ‘If the investors have more faith in it, investor will put more money in it. It will help securitization. That’s the holy grail’
A presentation that Walker gave to investors shows that 21st increased some life expectancy estimates by as much as 35%. Competitors who have analyzed the new 21st charts see average increases in mortality ratings of 20% to 25%.
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