Meet the Merchants of Death

Today’s New York Times has a fascinating, and depressing, look into the exciting new world of life insurance derivatives. That’s right, the same people that brought you such joyous inventions as the sub-prime mortgage have a new plan – securitizing life insurance. Some key quotes from the NYT piece:

Goldman, leading the way as always, with an index of death:

Goldman Sachs has developed a tradable index of life settlements, enabling investors to bet on whether people will live longer than expected or die sooner than planned. The index is similar to tradable stock market indices that allow investors to bet on the overall direction of the market without buying stocks.

The big problem? Unexpected increases in longevity. The solution? Well… “Oh no, not again” comes to mind:

In addition to fraud, there is another potential risk for investors: that some people could live far longer than expected.

It is not just a hypothetical risk. That is what happened in the 1980s, when new treatments prolonged the life of AIDS patients. Investors who bought their policies on the expectation that the most victims would die within two years ended up losing money.

In many ways, banks are seeking to replicate the model of subprime mortgage securities, which became popular after ratings agencies bestowed on them the comfort of a top-tier, triple-A rating. An individual mortgage to a home buyer with poor credit might have been considered risky, because of the possibility of default; but packaging lots of mortgages together limited risk, the theory went, because it was unlikely many would default at the same time.

A bond made up of life settlements would ideally have policies from people with a range of diseases — leukemia, lung cancer, heart disease, breast cancer, diabetes, Alzheimer’s. That is because if too many people with leukemia are in the securitization portfolio, and a cure is developed, the value of the bond would plummet.

But nothing bad could come from incentivizing financial capitalists to prevent increases in longevity, right?

But even with a math whiz calculating every possibility, some risks may not be apparent until after the fact. How can a computer accurately predict what would happen if health reform passed, for example, and better care for a large number of Americans meant that people generally started living longer? Or if a magic-bullet cure for all types of cancer was developed?

I’m imagining a cyberpunk novel, set 15 years from now, when a brilliant young researcher working in a corporate lab discovers a one-shot cure for cancer and is hunted down and killed before she can publish because the firm’s CFO has over-invested (both personally, and the corporate coffers) in life-insurance derivatives.

More banal, and more likely, is simply the creation of yet another reason to oppose meaningful health care reforms.

There is some resistance, likely to be futile:

Critics of life settlements believe “this defeats the idea of what life insurance is supposed to be,” said Steven Weisbart, senior vice president and chief economist for the Insurance Information Institute, a trade group. “It’s not an investment product, a gambling product.”

What do you bet that will go anywhere?

And I’ll finish with something from the, stop-me-if-you’ve-heard-this-one-before department:

“It’s an interesting asset class because it’s less correlated to the rest of the market than other asset classes,” Mr. Terrell said.

Oh no, not again.

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