Why securitize mortages when you can securitize life insurance?

[Golden Applesauce]

If you had any remaining hope for our future, check this out.

http://www.nytimes.com/2009/09/06/business/06insurance.html?_r=1&hp

After the mortgage business imploded last year, Wall Street investment banks began searching for another big idea to make money. They think they may have found one.

The bankers plan to buy "life settlements," life insurance policies that ill and elderly people sell for cash — $400,000 for a $1 million policy, say, depending on the life expectancy of the insured person. Then they plan to "securitize" these policies, in Wall Street jargon, by packaging hundreds or thousands together into bonds. They will then resell those bonds to investors, like big pension funds, who will receive the payouts when people with the insurance die.

The earlier the policyholder dies, the bigger the return — though if people live longer than expected, investors could get poor returns or even lose money.

Either way, Wall Street would profit by pocketing sizable fees for creating the bonds, reselling them and subsequently trading them. But some who have studied life settlements warn that insurers might have to raise premiums in the short term if they end up having to pay out more death claims than they had anticipated.

...

"We're hoping to get a herd stampeding after the first offering," said one investment banker not authorized to speak to the news media.

Among other things, they lose money big time if people start living longer than expected.  In other words, we're setting up a situation where if someone develops a cure for cancer, our economy will crash.  Again.

Remember how we had all these companies that were "too big to fail" and had to be rescued by our patriotic government?  Now we'll have the situation in reverse, only instead of doling out cash to "limit" economic ruin, the government will have to hold back a breakthrough in medicine for the same reason.

[Telarus]

www.phoenixtears.ca


Hironobu Sakaguchi knew what's up.

[Cain]

Doesn't this also mean that, since the single-payer option is off the table, that if Obama's New Improved Extra Special Watered Down bill actualy passes, it will create, uh, "subprime life insurance", making such an event more likely?  The logic here is more people will be entering the system, adding more money to the pot to be bundled up into securities, but these payments will be, in part dependent on the government paying in, and in part on anyone still having any jobs (the people who are without healthcare currently being mostly the lower working class, single mums etc and thus those worst hit by the recession).  In short, a very small "hiccup" in those payments, either from the government (Republicans take back Congress, Chinese decide they want their loans back pronto etc) or in the larger economy (unemployment continues to rise, a second dip in the economy) causes those people to withdraw, causing the securities to rapidly deappreciate in value, while being split up, rebundled, packaged and sold in a myriad of different ways through the international economic system.

Creating the exact same conditions, in fact, of the summer of 2007.

Normally I'm disdainful of "health care will bankrupt the economy!!!" arguments, namely because it hasn't happened elsewhere much.  But in this case, it does look a little more likely than some, thanks to the introduction of frat boys with credit cards international finance.

I'm also reminded of a line from The International, which I was watching again last night:

Umberto Calvini:  The IBBC is a bank. Their objective isn't to control the conflict, it's to control the debt that the conflict produces. You see, the real value of a conflict, the true value, is in the debt that it creates. You control the debt, you control everything. You find this upsetting, yes? But this is the very essence of the banking industry, to make us all, whether we be nations or individuals, slaves to debt.

[Iason Ouabache]

Who the hell actually thinks that this is a good idea? Sure, someone will gain a huge profit in the short term but the house of cards would fall apart pretty quickly.  Is there any chance that this could be blocked as part of the insurance reform?

[Triple Zero]

 actually, there is one reason why statistically, this plan might work out better than the mortgage stuff. they try to control the risk by adding a lot of them into bonds.

the idea is that the variation in returns will average out over a large number.

as we learned from Fooled by Randomness, in the financial world, often this doesn't really work out because the variables added together follow a fractal or power-law distribution, which are sneaky bastards cause they seem to average out but then will kick you in the back when you least expect it.

now while this is the case for all those mortgages and subprime diseased shit, people's life expectancy follows a nice Gaussian Normal distribution, regardless of improvements in medicine. people may suddenly live 10 years longer, or maybe if we're lucky twice as long, but not 10 or 100 or 1000 times as long.

[Cain]

OK, true.

But I'm more worried that other economic factors could cause people to drop out of paying insurance at all - which would effect what is traded and bring down the cost of securatized packages.  While life-span follows a Gaussian distribution, I suspect it is quite likely that "not being able to pay for insurance" does not.  As I understand it, the Obama plan is to subsidize payments, to make them "affordable".  So stumping up a plurality or majority of the fee.  However, it would likely be a system one could opt in or out of, and if economic times get as tough as they were around the start of the year, I can see people saying "screw that, I  need to pay for my rent and food" and withdrawing from their policies.

Although, I do not know for sure that this would follow a fractal/power-law distribution model, I rather suspect it would, since there is no functional difference between this model and the subprime mortgage model, except the product being traded.

[Golden Applesauce]

OK, true.

But I'm more worried that other economic factors could cause people to drop out of paying insurance at all - which would effect what is traded and bring down the cost of securatized packages.  While life-span follows a Gaussian distribution, I suspect it is quite likely that "not being able to pay for insurance" does not.  As I understand it, the Obama plan is to subsidize payments, to make them "affordable".  So stumping up a plurality or majority of the fee.  However, it would likely be a system one could opt in or out of, and if economic times get as tough as they were around the start of the year, I can see people saying "screw that, I  need to pay for my rent and food" and withdrawing from their policies.

Although, I do not know for sure that this would follow a fractal/power-law distribution model, I rather suspect it would, since there is no functional difference between this model and the subprime mortgage model, except the product being traded.

My understanding was that once the old guy sells his plan, he doesn't keep making payments - that's the responsibility of the bank that bought the plan.  Which will in the short term lose life insurance company's money and in the long term raise the price of life insurance, since the insurance companies expect that given percentage of people will end their life insurance payments before actually dying.

[Requia ☣]

this creates great new opportunities for suicide-insurance fraud.  Instead of taking a policy and trying to make it look like an accident, sell the policy, then just blow your brains out after you spend all the money on hookers and blow, the bank is left holding a useless asset.

[MMIX]

see this is what happens when you use something for a purpose it wasn't designed for - money is an exchange medium not a commodity

the rest is lies, damn lies and economics . . .