Comet Money Desk: Life Settlement Securities

You know we have a wide array of interests:

After the mortgage business imploded last year, Wall Street investment banks began searching for another big idea to make money. They think they may have found one.

The bankers plan to buy “life settlements,” life insurance policies that ill and elderly people sell for cash — $400,000 for a $1 million policy, say, depending on the life expectancy of the insured person. Then they plan to “securitize” these policies, in Wall Street jargon, by packaging hundreds or thousands together into bonds. They will then resell those bonds to investors, like big pension funds, who will receive the payouts when people with the insurance die. (NYT, Jenny Anderson, 9/05/09)

Sounds like there are clear risks for the initial purchasers and for the investors in the bonds these policies ultimately become -- and then in the long run, risks to the insurance market and to conventional purchasers of life insurance policies for whom this might make the whole business more expensive. And, at the end of the road, possibly more bubbles and crashes.

However to those who would initially sell these policies, it seems like the main risk is simply that it has yet to be attempted on any kind of major scale, so investors and bond ratings agencies alike would take very long and careful times in valuing and underwriting these investment vehicles. Maybe more so than it might sound like in a preliminary sales pitch.