Podcast Center
Video Center
Webcasts
Resource Center
Events
March 09, 2008 at 04:00 PM
The emergence of quantum physics shook up the world of relativity. (The main protagonists were Neils Bohr and Albert Einstein.)
This was a clash of two entirely different worlds: the small versus the large. Furthermore, quantum physics, unlike relativity, involved a fuzzy fog of probabilities; this caused Einstein’s famous remark that “God does not play dice.” Quantum physics also involved something even more amazing: instant “teleporting” over vast distances.
All of this has parallels to the world of life insurance settlements. Here is how:
The emergence of life settlements has shaken up the life insurance industry. Here, too, it’s a case of the small (individual policies) versus the large (the industry itself); and, like quantum physics, life settlements involve a fuzzy fog of probabilities.
Trying to teleport through the fog, I made inquiries to providers in the life settlement world; their answers, described below, were revealing.
So is the accompanying graph, which shows probabilities for a typical life settlement case (a 76-year-old nonsmoker male with numerous impairments). Note the large number of probabilities needed to describe the case. The “expectation of life,” a single number (11.35 years), is inadequate to describe it. Incidentally, this is the classical actuarial complete expectancy of life.
(Minor note: the expectation of life is not exactly the point where 50% of the deaths have occurred.)
It should be mentioned that there is an up and down confidence limit in play. The graph, which is based on averages, can’t convey that aspect of the fog of probabilities. Having considered the graph, let’s see what the life settlement experts had to say about their business.
Question: Is there a need to improve life evaluation methods?
Answer: Continued improvement is needed. For example, are wealthy individuals different? It will take 8-10 years before emerging results can be compared with current expectation of life estimates being made. In the meantime, can’t we see whether results are following the upslope in the early part of the graph? That would constitute confirmation.
