Saturday, July 21, 2007

Profiting from Mortality

There is no limit to the creativity of man, especially those from Wall Street.

At the outset, it may seem like a simple Asset backed investment. The finance engineers have cooked up a product which is backed by the Life Insurance settlements of numerous people - the earlier the underlying policy holders' death - the sooner the profits. No wonder these products are termed as 'Death' Bonds. The best part about this is well summarized in the following,

Firms say death bonds should return around 8% a year, right between the expected returns of stocks and Treasury bonds. Moreover, they're "uncorrelated assets," meaning their performance isn't tied to what's happening in other markets. After all, death rates don't rise or fall based on what's happening to commodities, say. Uncorrelated assets like these are highly prized in an increasingly connected global financial system.


I now clearly understand what an 'uncorrelated' investment is worth - life. What is not clear to me in such products is how the underlying policy holders are ready to accept the securitization concept when people are placing (though not explicitly) their bets on their death. The speculators may take out policies on the individual's behalf, pay them something up front, cover the premiums and then wait for the people to die. Seriously macabre. The most important of all questions in my mind is how these bonds be valued? The underlying policies may be those of healthy 30 year olds or octogenarians or terminally ill patients.

2 comments:

shrik said...

performance isn't tied to what's happening in other markets. After all, death rates don't rise or fall based on what's happening to commodities, say..

But with the increasing popularity of these bonds, can we expect an increase in crime rates? "Uncorrelated" my ass. Not for too long...

Selva said...

Uncorrelated is with respect to performance in other financial markets and definitely not uncorrelated with crime rates.
There is nothing called as absolute 'uncorrelation', the 'Uncorrelated' is with respect to something else ...that something else is 'financial markets',