Introduction to Life Settlements

Alexander  Braun; Lauren H. Cohen; Christopher J. Malloy; Jiahua  Xu

Background Note | HBS Case Collection | June 2018

Introduction to Life Settlements

by Alexander Braun, Lauren H. Cohen, Christopher J. Malloy and Jiahua Xu

Abstract

Life insurance is an asset owned by the majority of American adults (61%). Note that this 61% penetration rate is essentially at parity with home ownership (64%) and higher than that of 401(k) retirement account ownership (53%). Life settlements, or life insurance settlements, allow individuals to sell their life insurance policy in a secondary market. A life insurance policy is a tradable asset, for many individuals possibly the most valuable one in their portfolio after real estate and perhaps a retirement account. The fact that the policy is tradable, however, is hardly known to the general public. When surrendering a policy to the insurance carrier, the policyholder often incurs a substantial discount on its economic value. At the same time, the insurer keeps the difference between the policy’s economic value and its surrender value. By selling a policy in the secondary market, in contrast, it is common to achieve a price markedly above the surrender value. Hence, life settlements allow policyholders to capture a much larger, if not full, share of their contracts’ economic value. In this Industry Note, we lay out the basic structure of the market, the important players, and the basic economics. We also go into the potential ways to maximize returns in this market for both investors and policyholders.

Keywords: Insurance; Assets; Value; Markets; Investment Return;

Language: English

Format: Print

16 pages

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Citation:

Braun, Alexander, Lauren H. Cohen, Christopher J. Malloy, and Jiahua Xu. "Introduction to Life Settlements." Harvard Business School Background Note 218-127, June 2018.

Article | Journal of Finance | June 2020

Lazy Prices

Lauren Cohen, Christopher J. Malloy, Quoc Nguyen, Lauren Cohen, Christopher J. Malloy and Quoc Nguyen

We explore the implications of a subtle "default" choice that firms make in their regular reporting practices, namely that firms typically repeat what they most recently reported. Using the complete history of regular quarterly and annual filings by U.S. corporations from 1995 to 2014, we show that when firms make an active change in their reporting practices, this conveys an important signal about the firm. Changes to the language and construction of financial reports have strong implications for firms' future returns: a portfolio that shorts "changers" and buys "non-changers" earns up to 188 basis points per month (over 22% per year) in abnormal returns in the future. These reporting changes are concentrated in the management discussion (MD&A) section. Changes in language referring to the executive (CEO and CFO) team, or regarding litigation, are especially informative for future returns.

Keywords: information; default behavior; inertia; firms; annual reports; disclosure; Information; Business or Company Management; Behavior; Corporate Disclosure; Financial Reporting; United States;

Citation:

Cohen, Lauren, Christopher J. Malloy, and Quoc Nguyen. "Lazy Prices." Journal of Finance 75, no. 3 (June 2020): 1371–1415. (Winner of the First Prize, Chicago Quantitative Alliance Academic Paper Competition, 2016. Winner of the Jack Treynor Prize for superior work in the field of investment management and financial markets, sponsored by the Q-Group,The Institute for Quantitative Research in Finance, 2016. Winner of the Hillcrest Behavioral Finance Prize, 2016.) View Details

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Three years ago, Alvin Ang and his partner founded fidentiaX in Singapore, with the ambition to create the world’s first marketplace for tradable insurance policies on blockchain. With a 26-page white paper, the start-up closed a successful fundraising round through an initial coin offering (ICO). Three years later, however, the company still had not completed the infrastructure for the insurance trading platform. Besides the rapidly dwindling funds, fidentiaX had to fight with a tardy development team, uncooperative incumbent insurers, and begrudging investors. The case provides an overview of the blockchain industry and insights into the secondary life insurance market. Through the case, students will assess the company’s business strategies and learn about typical challenges faced by technology start-ups.

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Introduction to Life Settlements

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