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Goldman Establishes Swap Index For Life Settlement Market

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Although still a relatively new innovation, the secondary market for life insurance policies is showing signs of maturation, with the latest being the establishment of a swap index by a major financial institution.

The QxX index was created by Goldman Sachs, according to the company, to “allow market participants to measure, manage, and trade exposure to longevity and mortality risks in a standardized, transparent, and real-time manner.”

Effectively, said Goldman Sachs spokesman Michael DuVally, the swap index will allow major investors to take advantage of the secondary market without having to leap the hurdles that are typically a part of the process.

“Investors will trade this index and it will move up and down,” he said. “The key point is that conditions in the cash life settlement market are very cumbersome at the moment with each transaction requiring one-off documentation procedures. The beauty of the index is that it will be very easy to trade compared with individual life settlement policies.”

DuVally said the value of the index “is determined by the reference lives in the pool that underlies it,” and that the value will move up or down based on investors’ changing views on the longevity and mortality in the pool. According to the website for the index, the QxX index is initially based on a pool of 46,290 de-identified lives. The index will be published monthly, providing real time mortality information that will be tracked by an independent company based on the Social Security Death Index. Additionally, the index will provide a continually updated reference pool, which Goldman claims will allow it to incorporate trends in underwriting and the evolution of the marketplace.

Jack Kelly, director of government relations for the Institutional Life Markets Association, said the establishment of the index itself can be seen as evidence of the increasing maturity of the life settlement market as an investment. ILMA represents major institutional investors in the market, and “the institutional involvement in the premium finance and life settlement markets is strong and growing,” he said.

The involvement of institutional investors, according to Kelly, is not only a sign of the maturation of the secondary market, but a driving force behind it. ILMA has consistently pressed for increased transparency as a solution for many of the problems facing the industry, and earlier this year unveiled a proposed model disclosure. The creation of a swap index, Kelly said, is another example of the how institutional investors can improve the secondary market.

“Goldman’s index is a case in point for the positive influence the institutional players are having on the industry,” he said. “Many institutional investors, and ILMA’s members in particular, are leading the push for a more efficient and transparent marketplace.”

What developments, such as the establishment of an index, bring to the table according to Kelly, is an increased sense that those involved in the life settlement industry are not the shady characters drawn by critics, but financial professionals not unlike those in any other investment arena. “Professionalizing the industry and supporting its responsible growth benefits consumers and institutional investors.”

According to DuVally, that will be reflected in the types of investors that make use of the index. “In terms of what types of investors will use the index, we expect users to include hedge funds, money managers, insurance companies and pension funds.”

While the QxX index is the first of its kind, it will not be the only one. DuVally said Goldman is planning more indices, although he would not provide more details.

Kelly was also unable to point to any specific projects by ILMA members or others, but noted that further development of the market is anticipated in the coming year.

“We can expect to see more indexes and other industry advancements in 2008 as institutional investor interest and involvement continues,” he said.