Recent turbulence in the financial markets has highlighted the need for diversified portfolios with lower correlations between the different investments. Life settlements meet this need, offering investors the prospect of high, stable returns, uncorrelated with the broader financial markets. This book provides readers of all levels of experience with essential information on the process surrounding the acquisition and management of a portfolio of life settlements; the assessment, modelling and mitigation of the associated longevity, interest rate and credit risks; and practical approaches to financing and risk management structures. It begins with the history of life insurance and looks at how the need for new financing sources has led to the growth of the life settlements market in the United States. The authors provide a detailed exploration of the mathematical formulae surrounding the generation of mortality curves, drawing a parallel between the tools deployed in the credit derivatives market and those available to model longevity risk. Structured products and securitisation techniques are introduced and explained, starting with simple vanilla products and models before illustrating some of the investment structures associated with life settlements. Capital market mechanisms available to assist the investor in limiting the risks associated with life settlement portfolios are outlined, as are opportunities to use life settlement portfolios to mitigate the risks of traditional capital markets. The last section of the book covers derivative products, either available now or under consideration, that will reduce or potentially eliminate longevity risks within life settlement portfolios. It then reviews hedging and risk management strategies and considers how to measure the effectiveness of risk mitigation.

Recent turbulence in the financial markets has highlighted the needfor diversified portfolios with lower correlations between thedifferent investments. Life settlements meet this need, offeringinvestors the prospect of high, stable returns, uncorrelated withthe broader financial markets.This book provides readers of all levels of experience withessential information on the process surrounding the acquisitionand management of a portfolio of life settlements; the assessmentmodelling and mitigation of the associated longevity, interest rateand credit risks; and practical approaches to financing and riskmanagement structures. It begins with the history of life insuranceand looks at how the need for new financing sources has led to thegrowth of the life settlements market in the United States.The authors provide a detailed exploration of the mathematicalformulae surrounding the generation of mortality curves, drawing aparallel between the tools deployed in the credit derivativesmarket and those available to model longevity risk. Structuredproducts and securitisation techniques are introduced andexplained, starting with simple vanilla products and models beforeillustrating some of the investment structures associated with lifesettlements. Capital market mechanisms available to assist theinvestor in limiting the risks associated with life settlementportfolios are outlined, as are opportunities to use lifesettlement portfolios to mitigate the risks of traditional capitalmarkets. The last section of the book covers derivative productseither available now or under consideration, that will reduce orpotentially eliminate longevity risks within life settlementportfolios. It then reviews hedging and risk management strategiesand considers how to measure the effectiveness of riskmitigation.

Introduction by Con Keating1 Life Insurance: Primary and Secondary MarketsIntroduction1.1 History, application and termination of life insurance policies1.2 Life Insurance policy types and underwriting1.3 Development of the viatical settlement and life settlement markets1.4 The parties involved in a life settlement transaction1.5 The life settlement process1.6 Legal issues1.7 Other issues2 Mortality and Credit Structures, Valuation and RiskIntroduction2.1 CDS and CDO contracts2.2 Valuation approach and data2.3 The Poisson process2.4 Single life mortality calculations2.5 Correlation and portfolio calculations2.6 Rating transactions2.7 Risk management of a structured life settlements portfolio3 Structured Products and Securitization3.1 Securitization3.1.2 Prestructures3.2 Structured products3.3 The risks of structured products3.4 Modelling3.5 Life Settlement pool (LSP)3.6 Conclusion4 Examples of LSP Securitization: A Principal Protected FundIntroduction4.1 A Simple example4.2 Other pool examples4.3 Group policies4.4 ConclusionAppendix: Sample product description outlineA4.1 IntroductionA4.2 Product descriptionA4.3 Marketing assessmentA4.4 Modelling and pricingA4.5 Administration and accountingA4.6 Conclusion5 Capital Markets Products: Principal ProtectionIntroduction5.1 Bond constructions5.2 A zero coupon bond5.3 A coupon bond5.4 A convertible bond5.5 Principal protection5.6 Longevity bonds5.7 Sharia compliant bonds5.8 Power bonds5.9 CIOs and PACs, TACs and VADAMSs5.10 Equity-linked notes5.11 Conclusion6 Structured Financing: Guaranteed Loan repaymentIntroduction6.1 Project financing: Commercial and industrial uses6.2 Retail product6.3 Reverse mortgage or equity reversal programme6.4 Asset swaps6.5 The pension swap6.6 A New CPPI product6.7 Conclusion7 Life Settlement DerivativesIntroduction7.1 Longevity bonds7.2 Asset Swap7.3 Mortality curves7.4 Futures and forwards7.5 Options7.6 Synthetic pools7.7 Conclusion8 HedgingIntroduction8.1 Hedging longevity or extension risk8.2 Hedging with inverse longevity bond8.3 Futures-forwards8.4 Options8.5 Caps, floors and swaptions8.6 Hedging liquidity risk8.7 Hedging credit risk8.8 HER (Hedge efficiency ratio) for an inverse longevity bond8.9 ConclusionAppendixBibliographyIndex