Standard & Poor’s Ratings Services says that it sees inherent risks in securitizing life settlements and that it won’t be rating this type of investment any time soon.
When a company creates a life settlement security, it buys in-force life insurance policies, pools them, then uses the pool to back notes or other debt securities. Institutions and other investors buy the securities in an effort to diversify their portfolios.
Recently, institutions have been asking S&P about the securities, the rating agency says.
“Although both investors and originators see the potential benefits in this asset class, we believe there are inherent risks in, and obstacles to, securitizing life settlements,” says Winston Chang, a credit analyst at Standard & Poor’s, New York, who helped write an article about the topic posted on an S&P website.
S&P analysts write that one concern is that the pools backing life settlement securities rarely hold more than 100 policies.
“In our view, statistical credibility is unlikely to be achieved with a pool of less than 1,000 lives,” S&P analysts write.
The analysts also express concern about the issue of insurable interest. In a number of states, they write, the question of whether one can legally own a policy on a life in which one has no insurable interest remains an open issue, and courts in some states have ruled than an insurable interest must exist for a life insurance beneficiary to receive payment upon the death of the named insured.