As if facing a worldwide economic crisis weren’t enough, life settlement investors have found out in recent months that insureds are going to live longer than was previously thought.
At least two major medical underwriters, the companies that evaluate insureds’ current medical status and project how long they will live, have announced changes to their projections in recent months that lengthen their life expectancy estimates. While the insureds may welcome this new, if only statistical, lease on life, for investors it means that they will pay more premiums and see less profit from the transactions.
Minneapolis-based 21st Services announced changes to its projections that could be more than 20% in some cases, and Georgia-based AVS services followed with an announcement of a roughly 10% adjustment.
Part of the reason for the changes, according to 21st Century chief actuary Vincent Granieri, stems from the fact that “the life settlement business is still very young in terms of data that is available.”
As an industry, Granieri estimated that medical underwriters have probably evaluated less than half a million lives since they started providing life expectancy reports. “The good news,” he said, “is that all of them are life settlement lives” and are therefore relevant in terms of data. “The bad news is that it’s not enough to be credible” in terms of basing a model solely on those lives.
In general, he said, actuaries “are used to having millions” of data points to work with. “Over time that data will emerge,” he said, although he estimated that it may take a decade for the data to reach 1 million lives, “let alone 2 million or 3 million.”
Compounding the problem, he said, is the nature of much of the data that is out there, which comes from life insurance carriers. While there are ample individuals on which to base evaluations, he said, the issue is that the data tables that are provided were created for individuals seeking to obtain life insurance rather than those looking to sell an existing policy. Effectively, Granieri said, as life insurance actuaries are building their data tables they are going to factor in a higher mortality to rate as a conservative stance. For life settlement companies, a conservative stance would be the opposite; a low mortality rate that assumes individuals will live longer. “Conservative for them is quite aggressive for us,” he said.
As a result, he said, 21st has worked to combine the data of the 2008 Valuation Basic Table put out by the Society of Actuaries with the company’s own data, and has also begun efforts to test their models by comparing them with data from actual lives in the Medicare database during the 1990s.
For now, though, the question is how much damage has been done already to the market. Michael Fasano, president of Fasano Associates, a Washington, D.C.-based underwriting firm, noted that “clearly it’s had a chilling effect” on the market, and is one of the reasons for the turmoil being seen in the life settlement industry.