New Wall Street Idea: Buy and Securitize Life Insurance Policies of Elderly
Wall Street investment banks are planning to buy and securitize life insurance policies of older Americans.
A $1 million policy might be sold for $400,000, then bundled with other policies and sold to investors, the New York Times reports.
Duke law professor James Cox calls the development “bittersweet.”
“The sweet part is there are investors interested in exotic products created by underwriters who make large fees and rating agencies who then get paid to confer ratings,” he told the Times. “The bitter part is it’s a return to the good old days.”
The story says the plan could be good for Wall Street but bad for insurers, which set rates based on the assumption that policyholders will let their life insurance lapse before they die. If the policies are bought and securitized, insurers may lose money and pass on the loss in the form of increased premiums.
One of the critics is Franklin Best Jr. managing corporate counsel and secretary of the Penn Mutual Life Insurance Co. Writing in the spring/summer edition of the ABA’s Tort Trial & Insurance Practice Law Journal, he says it’s unclear whether investment bankers have underestimated the risk of securitization. “It is already clear, however, that, as with mortgages, the distancing of the source of the money from its use is a threat to the underlying industry,” he writes.
Updated at 12:12 p.m. to include a reference to the Franklin Best’s article and on Sept. 9 to include a link to the article.
