Actuary urges caution in the use of life settlements

Louise Witts, senior actuary for SL Investment Management, said: “Life settlement funds are attracting a lot of attention due to their potential to provide steady returns in volatile times.

“But it is an emerging industry in which the importance of applying a robust assessment to the quoted life expectancies is becoming increasingly evident.”

She said the methodology industry players currently use to determine life expectancy for life settlements needed to be adapted to paint a clearer picture of potential returns.

Ms Witts explained the life assurance industry’s standard method of predicting mortality is to use the 2008 Valuation Basic Table report and tables.

However, because the life settlements industry looks at individual life insurance products that are sold to the secondary market, these may not be fully representative of the whole population.

Ms Witts said: “The 2008 VBT was designed for insured populations whereas experience within the life settlement market points to early-years mortality being lighter than within the wider population, which could lead to assets being overvalued and liquidity requirements being underestimated.”

She added that additional factors that could lead to policies being unrealistically priced if medical records were not available or out of date.

Jonathan Hill, financial services manager for Somerset-based Milford & Dormor Solicitors, said: “I don’t use life settlement funds. I don’t understand them and I would need more transparency to use them.

“They are hard to value and that puts me off. The returns look great, but I can’t understand where they come from and where the risk is and that makes me nervous.”