dealing in death

Last year when i was looking at alternate asset classes to invest in - my insurance agent told me that i could buy out lapsed insurance policies from people not in a position to continue paying premium for various reasons. So this got me to do some research and as it turns out, some of the usual suspects ie goldman sachs, credit suisse, jpm etc etc were already dabbling into this.

now if a company like GS is into this you can take it for granted that this was another unregulated sector available for exploitation!!

now let us look at some of the reasons - common and otherwise as to why policies lapse:

1.1. the person just plain forgot and is hence unwilling to revive it paying the penalty.

1.2. the person does not have the money to continue making the premium payments.

1.3. the person would like to encash his policy as he no longer has anybody to leave the money (not uncommon in todays world where the younger gen at times predeceases the older..)

1.4. the person would like to get the money early for some expenditure.

etc etc..

what is the exploitation that is possible here?

2.1. once the policy is purchased as the benefits are still payable on the death of the insured there is an incentive in ensuring the early death of the seller. as we know that there are no criminals and psychopaths in this business so mainly policies of people terminally ill would be purchased, one presumes..

2.2. pricing would be opaque as there is no transparent pricing mechanism or an exchange wherein these are traded.

2.3. as there is no clear government policy on this there is no scope other than civil courts in case there is any misselling etc.

now lets look at the potential of this market:

for all the reasons listed in 1 above, it is highly recommended that a market for this is created and allowed by the government.

what the government/ policy maker should do:

1. whenever a policy is traded - the details of the insured should be deleted and only the policy details should be traded.

2. repo transactions in these should be allowed.

3. insurance companies should be allowed to buy out these policies at the traded price plus a markup within 3 days of a deal to ensure that the insurance companies can better manage their life costs.

4. the exchange for the same should be under the purview of SEBI while the policy for the methodology is made by IRDA.

5. only local players to deal in these policies till cross border re-insurance is allowed.

6. securitisation of these policies should not be allowed.

a pro-active policy making body and the creativity of the investment banks can make this a most exciting space for investments for a long time to come.

anybody willing to bet on the death of a insured to profit?

reinventing price?

Following on the earlier post of aug 3 (bailout anyone) - the evolution of business is to reprice itself going forward.

So how would we define this process of repricing? is it just lower pricing (as in the case of airlines and now more recently mobile telephony) or is it pricing for the use of the individual bits and pieces of infrastructure as opposed to paying for the whole?

let me put this in perspective - historically all companies used the government way of pricing (maybe thats why nobody is happy with the govt anywhere) ie you pay a global tax and in exchange you get security, roads, water etc etc.. but what about the ordinary joe who doesnt use a car - why is he contributing for the road the same way as the car user who actually wears down the road as opposed to our pedestrian?

similarly private companies price products "globally" - customers who dont want certain features end up paying for the others and in times of competition actually end up subsidising others use of features that they dont use. for example the airline industry as it created excess capacity willy nilly cut its "global" prices to attract customers and also expand the base by converting users of other modes of transport to take to the air. now if they had along with the cut in rates separately charged for luggage (as some US airlines are doing now), food on board and pay per view movies in flight etc etc they would have been less worse off than they are now.

similarly if the government were to collect user fee for urban infrastructure from those living in cities and these were tendered out - i am sure people wouldnt mind paying these fees as opposed to taxes which all evade. of course as the private operator doesnt have a blank cheque like the govt to keep paying salaries if the user doesnt pay up, you can bet the enforcement of bill collection will also be right up to the mark.