The insurance industry is in the business of controlling threats to life. It has invented new mortality gadgets, and now it needs to control them properly despite today’s tough times.
Before looking at the new mortality gadgets, let’s review the trend in insured life mortality since 1987. That’s shown in the Impact Chart. The amazing downtrend is largely due to the wearing-off of the effect of smoking. However, there were other causes too. One was the introduction of blood-testing in 1988; by 1992, this had had a major impact. Another was the widespread introduction of preferred underwriting; this showed an impact by 2002.
But who could have expected the new, potentially explosive mortality gadgets summarized in Lineup Chart? They’re a mixed bag; I’ll comment briefly about each.
Life settlements. The economic crisis has put many (but not all) investors in a holding pattern. The settlement market was thrown for a loop when some life expectancy providers recently changed their bases, resulting in much longer expectancies. Even so, the economic crisis has increased public demand; life settlements are here to stay.
Furthermore, a major phenomenon in the life settlement world is the sale of blocks of life settlement cases that are already in existence. The market is by no means restricted just to new cases.
Mortality swaps. There are many sophisticated examples of this new tool, particularly in overseas markets. Worried pension plan operators want to “get off the longevity risk” by swapping for predictable payment streams. The counterparties, who pull the swaps off, must be sure the old-age mortality is accurate.
Mortality bonds. One version would pay off in a large way if an overall mortality index reached a certain level. A mortality index is akin to the Dow Jones Industrial Index. (An example of such an index is the Bragg Life Index referenced in the Impact Chart.) This version of the mortality bond is intended to protect against epidemics or unpredictable developments which could cause a sudden increase in mortality generally. The “bird flu epidemic,” which was a possibility a few years ago, was the last scare along these lines; the AIDS scare in 1988 was another (and it did cause an upward bump in the Index).