New research revealed today by London Business School declared the policies, which have undergone onerous regulation in recent months, a ‘win-win’ for consumers and investors.
Through the analysis of a market sub-set of over 9,000 policies, insuring more than 7,100 individuals and with an aggregate death benefit of $24bn between 2001 and 2011, London Business School’s professor of finance, Narayan Naik, found the average annual expected return for investors was 8.4% more than that of treasury yields.
During recent years the study found the average annual expected return had risen substantially to 18.3%, some 15.9% in excess of treasury yields.
Even if the life expectancy of those insured [the accuracy of which effects returns] had been understated by three years, investors purchasing this sample of life settlements could still have expected a positive return of 3.2% per annum, Naik said.
Given the expected return and the fact longevity risk is largely uncorrelated with other financial markets, Naik said these policies appearto be an interesting investment opportunity for institutional investors.
FCA and retail investors
TLPIs or ‘death bonds’ first came under the FSA (now FCA)’s scrutiny in November 2011 when it termed them “high risk and toxic” products.
The City regulator said it had found significant problems with how they were designed, marketed and sold to UK retail investors.
Typically, UK retail investors would put their money into a pooled investment or fund which invests in US life insurance policies in order to access the asset class.
At the time the FSA said it was considering banning the sale of TLPIs to UK retail investors and announced a consultation which later broadened to include all Unregulated Collective Investment Schemes (Ucis).
Last week the regulator finally released details of the Ucis ban, restricting the marketing of such products to sophisticated investors and high net worth individuals, but crucially leaving out Enterprise Investment Schemes, Venture Capital Trusts and ETFs.
See the market reaction to the Ucis ban last week.
