Explaining the risk premiums of life settlements

Abstract

Life settlements may facilitate a more efficient insurance market, generate diversification benefits to investors, and even provide hedging benefits to Asia life insurers. The literature does not investigate what determines the risk premiums of life settlements, and we intend to fill this gap. We find that in spite of the premium for non-systematic mortality risk being substantial, the systematic premium is insignificant. On the other hand, the impact of tax on the life settlements` spreads is material. We further find that life settlements have negative betas and are quality assets when investors face market turmoil. The proprietary information provided by medical underwriters and the surrender behavior of the underlying policyholders are also significant determinants of the rate spreads for life settlements.