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June 29, 2008 at 04:00 PM
A new wrinkle on traditional life settlement contracts, so-called “synthetic” life settlements, is starting to surface.
Synthetic life settlements, in which investors can trade mortality risk without actually purchasing products, offer similar benefits for investors with fewer transactional burdens. They are creating opportunities, and, for some, concerns.
Alexi Poretz, an attorney in the New York office of the firm Sidley Austin, LLP specializing in insurance and finance, says that synthetic life settlements can take many different forms depending on the parties involved and their needs. “You’ll continue to see all sorts of variations,” he says. Generally, however, the principle behind such deals is the same: 2 or more counter-parties enter into an arrangement based on a pool of actual lives or data that mimics actual lives.
In many cases, he says, the transaction actually more closely resembles the sale of life insurance, with one party providing the other a steady stream of payments until a previously agreed upon “triggering event,” which could be something as simple as a set date, at which time the other party provides a payment based on how the pool has performed.
One example of a synthetic settlement structure is the QxX index maintained by Goldman Sachs, New York. Michael DuVally, a spokesman for Goldman Sachs, said the index is comprised of almost 50,000 actual lives.
“Investors gain exposure through swaps” of risk, he says. In entering a swap, Mr. DuVally says an investor, which would be a large institutional investor, can “sell protection” in which they would benefit from lower than expected mortality, or buy protection that benefits from greater than expected mortality.
Mr. Poretz notes that it is possible, in some transactions, for 1 of the parties to own some of the policies in a given pool and that a synthetic life settlement could be used by some institutional investors as a hedging tool for the mortality risk they’ve acquired through more “traditional” life settlements.
Using an index such as QxX provides significant advantages aside from a hedging capability, Mr. Duvally says. One such advantage is that “there’s a limited supply and access” to the pool, and that Goldman Sachs ensures that the information used in the pool is accurate and kept up to date, he adds. In addition, he says that the index allows for a more standardized version of a mortality risk swap, with less labor than a more traditional life settlement.
