The European Life Settlement Association (ELSA) has attacked a series of articles in leading newspapers, such as the Wall Street Journal and Financial Times, suggesting life settlements could be the next sub-prime investment disaster.
The newspapers, including the New York Times and the London Evening Standard, have claimed credit agencies have been approached to rate pools or securitizations of life settlements prompting the link with American sub-prime mortgages.
Life settlements are US life insurance backed investments, and relate to unwanted policies which have been sold by the policyseller to a financial institution in exchange for a cash sum. These policies relate to individuals over the age of 65 with an anticipated life expectancy of less than 15 years.
ELSA argues there is a lack of correlation between life settlements and market risk, and these uncorrelated returns provide a regular income stream for investors that is not subject to the traditional investment cycle.
It also claims growth of regulation in the sector in the US, including a SEC taskforce, means there is greater transparency for investors.
ELSA says: "Making comparisons with the subprime debacle is inaccurate as the mispricing of mortgage-backed securities in the credit crisis related to their high level of market risk. By contrast, life settlements are subject to little or no market risk as the return is dependent on the life insurance policy maturing on the policyholder's death.
"The volatile performance from equities and other traditional assets has made non-correlation highly desirable for portfolio diversification for investors burnt by poor investment performance in the financial crisis."
Andrew Wilkins, executive director at Catalyst Investment Group, who represents the needs of retail investors within ELSA, comments: "Now is the time for a healthy debate on the benefits and risks of life settlements, and for IFAs to engage in that discussion so investors have access to quality investments they understand and can trust".
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