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Life Settlements and Longevity Structures : Pricing and Risk Management

by Geoff Chaplin ( consultant); Jim Aspinwall; Mark Venn (Clear Life Limited)

ISBN13: 9780470684856
ISBN10: 0470684852
Format: eBook
Copyright: 2009-08-01
Publisher: Wiley

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1. Life Settlements and Longevity Structures : Pricing and Risk Management > ISBN13: 9780470684856

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Summary

The first guide to investing in and structuring life settlement policiesThis is the first book to cover life insurance products for the investment management industry. It provides in-depth coverage of the way the life insurance industry works, calculations of survival probabilities, and how to structure life settlement policies as standalone investments or as part of a structured portfolio. This is a growing industry due to the rising cost of living and increased healthcare costs.Geoff Chaplin (Tokyo, Japan) is Partner at Reoch Credit Partners, an ABS, life contingency, and credit consultancy. Jim Aspinwall (Residence, FL) is Adjunct Professor of Mathematics at Florida Southern University. He has formerly worked in investment banking and in risk management.

Introduction
Life Insurance: Primary and Secondary Markets
Introduction
History, application and termination of life insurance policies
History: Early life insurance
Modern insurance
Insurance moves to America
Summary
Applications of life insurance
The parties involved in a life insurance policy
Life insurance and life assurance
Termination and surrender of life insurance policies
Life Insurance policy types and underwriting
Universal life
Variable universal life
Term insurance
Endowment insurance
Whole life
Policy riders
Development of the viatical settlement and life settlement markets
History and inception
Negative sentiments
Market size
Institutional involvement
The parties involved in a life settlement transaction
The life settlement process
Legal issues
Other issues
Mortality and Credit Structures, Valuation and Risk
Introduction
CDS and CDO contracts
CDS
CDO
Synthetic and cash flow CDOs
Life policy CDOs
Valuation approach and data
Approach
Data
The poisson process
Single life mortality calculations
Corporate mortality: CDS contracts and bond pricing
Generic life policy valuation
Mortality adjustments
Risk analysis in the life assurance context - mortality curve stresses
Correlation and portfolio calculations
Copulas
Bivariate copulas
Gaussian copula and correlation in CDO structures
Correlation in life insurance
Rating transactions
Risk management of a structured life settlements portfolio
Risk managing a book of traded financial assets
Risk managing a portfolio of mortality risks in an insurance company
Risk managing a life settlements portfolio
Current risk management software
Structured Products and Securitization
Securitization
Other examples: Synthetic securitization
Prestructures
Structured products
Mortgage structures
Other examples
The risks of structured products
Problems with correlations and volatility
Pricing structures
Modelling
Implied models
Parametric models
Realized moments
Life Settlement pool (LSP)
Volatility in LSPs
Correlation in LSPs
Credit risks
LSP: Examples
Other risks
Due diligence
Conclusion
Examples of LSP Securitization: A Principal Protected Fund
Introduction
A simple example
Other pool examples
Assumptions
Statically managed fund
A Managed pool
Looking at risks
Leveraged reinvested pools
Group policies
Conclusion
Administration
Modelling
Appendix: Sample product description outline
Introduction
Product description
Marketing assessment
Modelling and pricing
Administration and accounting
Conclusion
Capital Markets Products: Principal Protection
Introduction
Bond constructions
A zero coupon bond
A coupon bond
A convertible bond
The convertible is exercised
The convertible is not exercised
Principal protection
Longevity bonds
The longevity bonds: Principal at risk
Longevity bonds: Coupons at risk
The inverse longevity bond
Sharia compliant bonds
Power bonds
CIOs and PACs, TACs and VADAMSs
A collateralized insurance obligation
PAC
PAC bond - breaching the boundaries by 40%
Equity-linked notes
Conclusion
Structured Financing: Guaranteed Loan repayment
Introduction
Project financing: Commercial and industrial uses
Purchase of a restaurant chain
Leasing
Balance sheet restructuring
Retail product
Principal reduced mortgages
Credit enhancement for the retail borrower
Reverse mortgage or equity reversal programme
Home lease programme
Asset swaps
Simple review
The sub-prime swap
Risks of this transaction
The pension swap
A New CPPI product
The initial CPPI study
Allocation process
Conclusion
Life Settlement Derivatives
Introduction
Longevity bonds
Asset Swap
Deterministic mortality swap
Mortality swap: Single payment
Mortality swap: Multiple periods
Mortality curves
The forward mortality rate
Interest rates
Interest rate swap
Forward rate agreements
Mortality rate
Futures and forwards
Options
Review of option pricing models used to price mortality options
Options on longevity bond future
Options on the longevity spot bond
Put option on the longevity of the pool
Mortality caps, floors and swaptions
Interest rate caps
Interest rate swaption
Mortality caps
Synthetic pools
Conclusion
Hedging
Introduction
Hedging longevity or extension risk
Longevity bonds
Asset swaps
Annuity hedging
Single premium annuity
80% runoff with no annuity vs. an annuity
40% runoff with no annuity
40% runoff with single premium annuity
80% runoff with an annuity payout per year
Summary
Hedging with inverse longevity bond
Hedging with a surety bond
Hedging with an insurance wrap
Over-collateralization
Hedging with a mortality swap
Futures-forwards
Options
Bond options
Put option on the longevity
Caps, floors and swaptions
Caps
Swaptions
Hedging liquidity risk
Establishing a reserve
Establishing a liquidity provider
Partial portfolio sale
Borrow against the portfolio
Hedging credit risk
Diversification
Credit risk
Hedging efficiency
HER (Hedge efficiency ratio) for an inverse longevity bond
Theory
Hedging effectiveness
Effectiveness of a hedge: the calculation
Risks
HER for an annuity
HER for an inverse longevity bond
HER for a mortality swap
Conclusion
Appendix
Bibliography
Index
Table of Contents provided by Publisher. All Rights Reserved.

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Life Settlements and Longevity Structures : Pricing and Risk Management

Summary

Table of Contents

Supplemental Materials

Rewards Program