Life Settlement Funds: Current Valuation Practices and Areas for Improvement

23 Pages Posted: 26 Sep 2016

See all articles by Alexander Braun

Alexander Braun

University of St. Gallen - I.VW-HSG

Sarah Affolter

KPMG AG (Zurich)

Hato Schmeiser

University of Muenster - Faculty of Economics; University of St. Gallen - I.VW-HSG

Date Written: Fall 2016

Abstract

We analyze the prevailing valuation practices in the life settlement industry based on a sample of 11 funds that cover a large portion of the current market. The most striking result is that a majority of asset managers seem to substantially overvalue their portfolios relative to the prices of comparable transactions that have recently been closed. Drawing on market‐consistent estimates with regard to medical underwriting, it is possible to trace back the observed discrepancies to inadequately low model inputs for life expectancies and discount rates. The main consequences are a dissimilar treatment of investor groups in open‐end funds structures as well as an unduly high compensation for managers and third parties. To address this predicament, we suggest defining life settlements as level 2 assets in the fair value hierarchy of IFRS 13, improving transparency and disclosure requirements, and developing new incentive‐compatible fee schedules.

Suggested Citation

Braun, Alexander and Affolter, Sarah and Schmeiser, Hato, Life Settlement Funds: Current Valuation Practices and Areas for Improvement (Fall 2016). Risk Management and Insurance Review, Vol. 19, Issue 2, pp. 173-195, 2016. Available at SSRN: https://ssrn.com/abstract=2842873 or http://dx.doi.org/10.1111/rmir.12042

Alexander Braun (Contact Author)

University of St. Gallen - I.VW-HSG ( email )

Kirchlistrasse 2
St. Gallen, 9010
Switzerland

Sarah Affolter

KPMG AG (Zurich) ( email )

Badenerstrasse 172
Zürich, 8026
Switzerland

Hato Schmeiser

University of Muenster - Faculty of Economics ( email )

Universitätsstr. 14-16
48143 Munster
Germany

University of St. Gallen - I.VW-HSG ( email )

Kirchlistrasse 2
St. Gallen, 9010
Switzerland

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