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?