Synthetic life settlements are financial contracts tied to someone’s’ actual life expectancy, or in another variation, on a group of lives. The contract issuer collects premiums from the contract holder and pays a benefit upon the individual’s death.
With these products, the investors rely on the credit rating of the bank, because what one is buying is not an actual policy with underlying assets, he notes.
“What happens if you buy from an AA [credit rating] bank that in 10 years becomes a BB bank?” he asks. “If I own an actual policy, I can see everything that’s going on, I can watch the credit rating of the carrier, and then I can sell the asset if I want.”
Simon predicts that for that reason, synthetic products will not be as marketable as life settlements. “The negatives far outweigh the positive, in my opinion,” he says.
“I don’t want a derivative product,” he concludes. “In today’s market, I want to touch and feel the asset.”
http://www.lifeandhealthinsurancenews.com/Exclusives/2009/02/Pages/Settlement-executives-size-up-new-product-competition.aspx
http://www.calbrokermag.com/Magazine/story/Dec08/weiss.htm
Nowadays, pretty much any time you bundle and chop, red flags will be raised. Add to that difficult-to-quantify risk and you've got something that smells a bit like mortgage backed securities.
http://www.efinancialblog.com/bundling-life-insurance-banking-oldfashioned/
