In the wake of IFRS 13 and AIFMD, assets are required to be held at fair value, namely their potential market price. We provide empirical evidence that the market price of the asset class senior life settlements can be conclusively predicted based on policy traits and the life expectancy of the insured. Using a series of OLS regressions with robust standard errors, we establish a parsimonious pricing model based on two variables: life expectancy and premiums. Compared to the classical actuarial approach, our model is advantageous in that it does not necessitate assumptions on risk premium and insureds' mortality rates. Our sample consists of real transaction data that underpin the model's ability to predict market-consistent prices. The model performs strongly both in-sample and out-of-sample, and, upon adequate calibration, remains stable across life insurance product types, carrier ratings, and medical underwriters. This new approach supports practitioners in the senior settlement market, who can easily implement the model as a valuation rule of thumb.
Language
English
HSG Classification
contribution to scientific community
Event Title
Western Risk & Insurance Association (WRIA) Annual Meeting