Life settlements need accurate valuations

Accurate valuation methods should be the top concern for life settlements to prevent funds being overvalued, with regular reviews and refreshers on life expectancy essential, according to SL Investment Management.

The Life Settlement product provider said potential investors into Life Settlement Funds must look at providers' asset valuation methodologies, as some funds have not taken significant longevity revisions into account over the last few years. There are using inadequate methodologies, and so are overvalued.

There is currently, however, no standard valuation practice in place, with some companies placing policy maturation at or shortly after the Life Expectancy (LE) of an assured life. This, SL said, could push overvaluations to 40 per cent on a policy with a six year life expectancy, for example.

An actuarial approach is necessary to asset valuation, a method which would prevent the policy being over-inflated. A more prudent and informed approach to the anticipated rate of projected maturities would bring the valuation closer to the realisable value.

"Justifiably, investors are attracted to this asset class by the impressive potential returns and lack of market correlation, but they do need to make sure that the Manager has its feet firmly on the ground," explained Jeremy Brettell, chief executive at SL Investment Management. "We have seen examples in the market where the valuation basis and realisable value have become out-of-step. When this has happened, some investors who subscribed late have paid an inflated price to buy into funds and have since lost a substantial proportion of the value of their original investment. It is imperative to team up with a regulated Investment Manager with the appropriate internal controls and one that has sufficient experience and actuarial expertise of the asset class to ensure a fair outcome to all."

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