Life settlement code falls short of expectations

How can ANY IFA reccomend anything going forward where there is a possibility of the company going in to liquidation as in doing so, any complaint upheld by the FOS against the firm to do with that company will NOT be covered by most PI companies.

See beloe from my PI insurer with regard what were very small investments as parts of client portfolios -

"I refer to your notification regarding the above matter. Insurer’s note that the potential complaint concerns an investment in Keydata, which is now insolvent. You will note that under exclusion clause 2.4.17 of the policy, any claims arising out of or relating directly or indirectly to the insolvency of any business, firm or company with whom the Insured has arranged directly or indirectly any insurances, investments or deposits is excluded. As such, the policy does not cover this claim and Insurer’s shall be closing their file.

Without prejudice to the policy position, Insurer’s note that you are concerned about getting into a conversation with the clients regarding the recovery of their investment. In that regard, Insurer’s would suggest that you, whilst it can discuss what information is available in the public domain about Keydata, in terms of recovery of the investment, you should advise its client to seek independent advice as the client could equally complain about any advice given by you especially if that turns out to be unsuccessful."

Kind regards

So let me get this straight, the chairman of this new voluntary group is Mr McAdams, who is investment director of SL Investment Management, who it seems may be facing legal action for their role in the 'problems' at Preferred?

Is this really meant to fill me with confidence?

As Jason Butler quite correctly says, who are these experts working out the life expectancies of policyholders, and why should we trust their calculations to be anything like accurate? Or is it perhaps all just 'educated' guesswork?

I think this is an area myself and my clients might well be best to avoid!

And although it may be a little controversial, well done to the FSA chap for having a real go at this sector. Shame they didn't step in with their concerns even earlier.

In answer to Stephen Cooper & Simon Butler regarding life expectancies (LEs), I can tell you how it 'should be' and probably is done by most funds.

There are a small number of underwriting companies in the US specialising in producing LEs based on medical records of the insured. Most of these companies are reputable and anyone buying policies will know their respective methodologies and how conservative they are or are not.

Some funds will also have access to either medical professionals or actuaries to double-check the LEs, and use an average of LE estimates from 2 different companies.

However, in late 2008 a new Valuation Basic Table (the 2008 VBT) was issued which included significant extensions to LEs to reflect both medical advances and increasing longevity. As a result the LE providers mostly reviewed their own methodology, resulting in extensions of >20% in some categories of lives assured. Obviously this has hit some funds hard due to the correspondingly higher premium obligation implied.

Some more conservative funds will have had a reserve in place which will have softened the impact of these changes, but others will suffer.

Admittedly reduced liquidity in the broader capital markets has also played its part and no doubt exacerbated the situation, especially for funds paying an income option.

On the positive side, the 2008 VBT and associated Relative Risk tables were based on a detailed study by the Society of Actuaries & the American Academy of Actuaries of 700,000 'mortality experiences', and is the largest sample of mortality data ever assembled from the insurance industry.

This development should provide significant comfort to investors that LEs produced since early 2009 are likely far more accurate than the majority of their predecessors.

As always though the final call on the LE used for valuation is with the fund itself, so investors/advisors should ensure that they fully understand this methodology as part of their normal due diligence.

Sorry to post anon. The risk for a consumer and an adviser with these now appears that many are not covered by the FSCS whoever is at fault and if fault is found and the client blames the adviser and the FOS agree, there is often no PI cover.

My thanks to CharlesM for his comprehensive reply, which is very interesting and well put. However, whilst this is reassuring for new investors, will it only hold good until such time as a further new VBT is issued, possibly improving life expectancies by as much as 20% again?

My point, although perhaps not very well made previously, is that we pretty much have to accept the competancy of the actuaries behind these issues, where we are not perhaps well placed to check their methodology. Certainly some of these actuaries have got it badly wrong (perhaps with the benefit of hindsight) in the past and investors are now suffering as a result. I know it is wrong to say all life settlement funds are inheritantly bad, but it is a matter of a whole lot of trust on our part when we recommend these.

Stephen,

This is a very broad subject and difficult to cover in a comment, but I'll try to answer that as I appreciate the subject can be rather opaque from the outside.

Surprisingly the overall mortality rate in seniors changed by less than 5% between then VBT 2001 and VBT 2008 tables, however there have been larger changes in sub-categories of the population. For example LEs for females have increased by around 10% overall, while LEs for males are relatively unchanged and LEs for smokers continue to decline.

It appears to me therefore that the LE providers have adjusted their methodology to account for future short-term extensions in longevity, as they appreciate the disruption caused by their 2008 revisions and that they have to do better.

Being a relatively young asset class there has been a lack of actual to expected mortality data available from the LE providers in order to benchmark their performance. However, as with other areas of Life Settlements this is starting to change as the business matures, and the trend I believe is towards transparency.

I fully appreciate your point regarding the issues of trust involved, and it is unfortunate that some retail investors have suffered the consequences of an asset in its relative infancy and the fallout from the inevitable learning curve.

Despite the past though I personally see Life Settlements at their current stage of development as a very attractive investment for institutions and even for retail when structured and managed transparently and conservatively. For the record I have no affiliation with any LS fund.