Monday, September 07, 2009

The ultimate moral hazard?

[Investment] 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.


So says a story by Jenny Anderson in yesterday's New York Times. Does anyone else see a problem with this? Benefits paid earlier are more valuable than benefits paid later (because of discounting). Doesn't this give investors an incentive to encourage people to die earlier? My colleague Larry Harris taught me that laws prohibit me from buying life insurance on a third party's life that leaves me as a beneficiary, for pretty obvious reasons. This kind of proposed securitization strikes me as a similar sort of thing.

Perhaps I am too paranoid, but events of the past few years leaves me good reason to be so.

3 comments:

Rob Wanerman said...

Richard: The guys who brought us credit default swaps are now going into a market that previously was populated by small (and questionable) outfits. They came up with the Latin-tinged term "viatical settlements" and preyed on AIDS patients with life insurance but no health insurance.

Jack said...

i can see the problem with it and now its come true

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