Ah, the innovation of Wall Street: they've found a way to buy and sell your own grandma.
You've heard of lump sum payments? That's where a person is due a series of payments and a vendor offers to buy all their future payments for a fraction of their total value. Person is going to get 100,000 over ten years, but would be willing to take 50,000 right now.
Turns out you can do this with life insurance. A person entitled to a 200,000 payout on their life policy might be willing to take 75,000 right now. Especially since the normal order of things has them dying before they get paid.
This isn't new - wasn't so long ago aids victims were cashing in their life policies to pay for treatment. In some of those cases, this turned out to be win-win.
The new wrinkle is securitization. The NYT points out that now these life polices can be bought up and turned into securities by "packaging hundreds or thousands together into bonds. [Banks] will then resell those bonds to investors, like big pension funds, who will receive the payouts when people with the insurance die."
The idea is still in the planning stages. But already “our phones have been ringing off the hook with inquiries,” says Kathleen Tillwitz, a senior vice president at DBRS, which gives risk ratings to investments and is reviewing nine proposals for life-insurance securitizations from private investors and financial firms, including Credit Suisse.
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what is good for Wall Street could be bad for the insurance industry, and perhaps for customers, too. That is because policyholders often let their life insurance lapse before they die, for a variety of reasons — their children grow up and no longer need the financial protection, or the premiums become too expensive. When that happens, the insurer does not have to make a payout.
But if a policy is purchased and packaged into a security, investors will keep paying the premiums that might have been abandoned; as a result, more policies will stay in force, ensuring more payouts over time and less money for the insurance companies.
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Undeterred, Wall Street is racing ahead for a simple reason: With $26 trillion of life insurance policies in force in the United States, the market could be huge.
Naturally, Goldmann Sachs is involved (because $26 trillion smells like money) - and the credit rating agencies are making noises like this time they will be careful. Last year's $8.3 trillion dollar adjustment has inspired them.
The next time an investment bank comes to them with an investment product (and its corresponding fee), they will think long and hard before they reflexively cash the check and deliver a AAA rating.
So now we know - the next bubble will be old people.
Get yours while prices are low.
2 comments:
This time the ratings agencies have a plan B. Let's just say, named insured, look carefully before crossing the street.
No doubt.
I mean, talk about moral hazard.
Kendricks! We need to boost Q3 earnings! Organize a base jumping holiday for our insureds. Someplace where regulation is...lax.
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