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> The company sold more than 20,000 individual investors fractional shares in life settlements—the right to collect on a stranger’s life insurance policy when t

by oefrha 5y ago

> The company sold more than 20,000 individual investors fractional shares in life settlements—the right to collect on a stranger’s life insurance policy when the insured person dies. Mr. McPherson suspected the company was overcharging clients by providing misleading estimates of how quickly the insured person was likely to die. Not directly related to the whistleblowing case, but this life settlement investment concept is new to me, and apparently it’s a well-established market: https://www.forbes.com/sites/forbesfinancecouncil/2021/03/09/how-life-settlements-can-offer-returns-and-diversification/?sh=71a12c5b884b https://www.forbes.com/sites/forbesfinancecouncil/2021/03/09... Honestly, I find this concept rather disturbing.

jedberg 5y ago
It's disturbing but makes sense in a lot of business contexts. Imagine I own a business and I have a key employee who has a unique skill. And if they were to die, my business would have serious problems. It makes sense to take out a life insurance policy on that person to protect my lost revenue. Or let's say I have a business partner, we own the business 50/50. It makes a lot of sense for each of us to have a life insurance policy on the other person to make up for the fact that the business might likely die if the person does. Where it's kind of screwed up is when Walmart takes out policies on their front line retail employees and doesn't tell them as a way of diversifying revenue.
- gruez 5y ago
  >Where it's kind of screwed up is when Walmart takes out policies on their front line retail employees and doesn't tell them Why is that screwed up? It doesn't affect them in any way.
  - jessaustin 5y ago
    It allows Walmart to care less about safe working conditions for its employees.
    - gruez 5y ago
      Is there any evidence they're doing that? Moreover, if they would do that, wouldn't that be already be priced in by the insurance company, wiping out any potential gains?
      - jessaustin 5y ago
        There may be evidence but I don't know about it. If we were talking about insurance for property damage, I could almost agree with the "priced-in" idea, [EDIT:] although that assumes a very efficient torts system for the third parties who suffer damage to their property. There is an inherent asymmetry when we're talking about the health and lives of third parties, however. If anything firms should be encouraged to care more about not killing their employees.
  - ineptech 5y ago
    Walmart isn't some disinterested third party; they enact policies that directly affect their employees' health and longevity. It's a pretty perverse incentive for the party responsible for negotiating and administering your health insurance to have a financial interest in you dying younger than expected.
- oefrha 5y ago
  Life insurance makes total sense and is a good thing in general for the family and possibly the business involved. The part I find disturbing is investing in the life insurance policies of complete strangers where the return on investment depends on the demise of said strangers.
gruez 5y ago
This is baffling. Is this supposed to provide above market returns (after adjusting for risk)? If not, what's the point? If yes, how's the counterparty to this (insurance companies) coming up with the returns? After all, they're just investing the money so they can pay out a few decades later; it's not like they can print money to do the payouts. Are they just betting on the insurance companies mispricing their insurance products?
- oefrha 5y ago
  According to the Forbes article I linked, they selectively invest in policies that will likely see a payout (old people with health issues) and ignore the rest. They then pay the premiums to keep the policies alive until they can cash out.
- hogFeast 5y ago
  Either the person who bought the policy wants to sell or the insurer who wrote the policy wants to sell. The person selling wants cash today, and the person buying wants cash tomorrow. Same as anything else. EDIT: I will add, there is a lot of this kind of thing going on in insurance now because no-one expected rates to stay this low for so long. This drives cash out of insurers who, often, have a massive stream of liabilities and no way to generate cash to pay them. And this specific market is driven more by individuals who took out huge life insurance policies, lived longer than they expected, and are now stuck paying huge premiums they can't afford (so they sell the policy to someone else, who pays the premiums, and collects the final value). Again, this is basically how financial markets work. Risk is shifted towards those who are most able to bear it. The alternative here is a bunch of old people having to declare bankruptcy and being stripped of all their assets because there is no-one who will cash their policy.
- jcheng 5y ago
  > Are they just betting on the insurance companies mispricing their insurance products? Sort of. First, the investors are betting that the information they have now (when the insured wants to sell) is better than what the insurance company had then (when the insured purchased the policy). Second, life insurance policies have a “cash surrender” value, basically an amount of money that the insurance company will pay to the insured to give up the policy. These days those cash surrender values are extremely low, as the insurance companies rely on the difference to boost profits; they can do this because many policyholders don’t know there are alternatives to surrendering the policy if they can’t make the payments. What’s attractive about this from an investor’s perspective is not outsized returns, but returns that are uncorrelated with the market. I was pretty grossed out when I first heard of this kind of investment but then learned that it first became popular during the AIDS epidemic. Selling their life insurance policies was a way for the terminally ill to benefit from an asset that was not going to have any value to them after death (if they had no family to benefit from the payout). Without investors providing a market for these policies, they’d have to settle for the cash surrender value.
mcguire 5y ago
My understanding is that they became common during the AIDS epidemic, with people selling their life insurance proceeds early in order to get money for their current living expenses. It's a little disturbing, but it makes sense.

by oefrha 5y ago

jedberg 5y ago

It's disturbing but makes sense in a lot of business contexts. Imagine I own a business and I have a key employee who has a unique skill. And if they were to die, my business would have serious problems. It makes sense to take out a life insurance policy on that person to protect my lost revenue. Or let's say I have a business partner, we own the business 50/50. It makes a lot of sense for each of us to have a life insurance policy on the other person to make up for the fact that the business might likely die if the person does. Where it's kind of screwed up is when Walmart takes out policies on their front line retail employees and doesn't tell them as a way of diversifying revenue.

gruez 5y ago
>Where it's kind of screwed up is when Walmart takes out policies on their front line retail employees and doesn't tell them Why is that screwed up? It doesn't affect them in any way.
- jessaustin 5y ago
  It allows Walmart to care less about safe working conditions for its employees.
  - gruez 5y ago
    Is there any evidence they're doing that? Moreover, if they would do that, wouldn't that be already be priced in by the insurance company, wiping out any potential gains?
    - jessaustin 5y ago
      There may be evidence but I don't know about it. If we were talking about insurance for property damage, I could almost agree with the "priced-in" idea, [EDIT:] although that assumes a very efficient torts system for the third parties who suffer damage to their property. There is an inherent asymmetry when we're talking about the health and lives of third parties, however. If anything firms should be encouraged to care more about not killing their employees.
- ineptech 5y ago
  Walmart isn't some disinterested third party; they enact policies that directly affect their employees' health and longevity. It's a pretty perverse incentive for the party responsible for negotiating and administering your health insurance to have a financial interest in you dying younger than expected.
oefrha 5y ago
Life insurance makes total sense and is a good thing in general for the family and possibly the business involved. The part I find disturbing is investing in the life insurance policies of complete strangers where the return on investment depends on the demise of said strangers.

gruez 5y ago

This is baffling. Is this supposed to provide above market returns (after adjusting for risk)? If not, what's the point? If yes, how's the counterparty to this (insurance companies) coming up with the returns? After all, they're just investing the money so they can pay out a few decades later; it's not like they can print money to do the payouts. Are they just betting on the insurance companies mispricing their insurance products?

oefrha 5y ago
According to the Forbes article I linked, they selectively invest in policies that will likely see a payout (old people with health issues) and ignore the rest. They then pay the premiums to keep the policies alive until they can cash out.
hogFeast 5y ago
Either the person who bought the policy wants to sell or the insurer who wrote the policy wants to sell. The person selling wants cash today, and the person buying wants cash tomorrow. Same as anything else. EDIT: I will add, there is a lot of this kind of thing going on in insurance now because no-one expected rates to stay this low for so long. This drives cash out of insurers who, often, have a massive stream of liabilities and no way to generate cash to pay them. And this specific market is driven more by individuals who took out huge life insurance policies, lived longer than they expected, and are now stuck paying huge premiums they can't afford (so they sell the policy to someone else, who pays the premiums, and collects the final value). Again, this is basically how financial markets work. Risk is shifted towards those who are most able to bear it. The alternative here is a bunch of old people having to declare bankruptcy and being stripped of all their assets because there is no-one who will cash their policy.
jcheng 5y ago
> Are they just betting on the insurance companies mispricing their insurance products? Sort of. First, the investors are betting that the information they have now (when the insured wants to sell) is better than what the insurance company had then (when the insured purchased the policy). Second, life insurance policies have a “cash surrender” value, basically an amount of money that the insurance company will pay to the insured to give up the policy. These days those cash surrender values are extremely low, as the insurance companies rely on the difference to boost profits; they can do this because many policyholders don’t know there are alternatives to surrendering the policy if they can’t make the payments. What’s attractive about this from an investor’s perspective is not outsized returns, but returns that are uncorrelated with the market. I was pretty grossed out when I first heard of this kind of investment but then learned that it first became popular during the AIDS epidemic. Selling their life insurance policies was a way for the terminally ill to benefit from an asset that was not going to have any value to them after death (if they had no family to benefit from the payout). Without investors providing a market for these policies, they’d have to settle for the cash surrender value.

mcguire 5y ago

My understanding is that they became common during the AIDS epidemic, with people selling their life insurance proceeds early in order to get money for their current living expenses. It's a little disturbing, but it makes sense.