Saturday, February 16, 2008

Macabre investments

A brief story on death bonds appeared in this week's BusinessWeek. It gives a succinct description of what they are:

The business model is straightforward. Policyholders, usually people over 65 holding multimillion-dollar plans, agree to sell their insurance to investors, often at a third of its value. The new owners pay the premiums and ultimately collect the death benefit. Those speculators are ghoulishly betting that the former policyholders will die sooner rather than later, creating an early payout and a tidy profit.
No surprise, Goldman is getting into these exotic instruments, and even creating an index for them:
As a precursor to offering death bonds, Goldman in December launched a "mortality index" that tracks the life expectancy of 65-year-olds with policies. The index, which would allow investors to buy derivatives pegged to it, means they could hedge against the risks of people living longer than anticipated. That's a key tool for marketing these products to institutions and other buyers.
The article also delves into issues Goldman is having with the bonds, and they haven't actually issued one yet. I don't think I'll be investing in these, but they are interesting nonetheless. There's a graphic that's only in the print magazine that states the market for unwanted life insurance policies has increased from $8 billion in 2005 to $15 billion now.