New Exotic Investments Are Emerging on Wall Street

This morning I was reading an Article about the ever new and exciting instruments that wall street is coming up with. Last year there was a mad dash by investment firms to purchase life settlements policies from elderly people. They plan to package them, rate them, and sell them off to investors much like they did with the mortgage markets. The article goes on to talk about the large fees that Wall Street would collect by creating, packaging and selling these life settlement policies. It looks like they are back to the same old tricks.

By packaging these types of instruments what effect is this going to have on Life Insurance premiums? During these last couple of years companies like Mass Mutual, North Western and New York Life have been the bright spots in an otherwise ugly economy. What will this do to their companies if they have to start paying out death benefits? Their profit margins could collapse quickly if they do not hedge themselves.

I personally think that that it is a great idea and could produce a lot of great investment products in the future but at the same time there are a lot of unknowns in these products. What happens if people start living longer? Investors could end up losing a lot of money. What if these large insurance companies can not pay out the death benefit's? Who is going to bail them out? There are a lot of different variables that could come into play here. The biggest concern I have is that big Life Insurance companies build their model around not having to pay the benefits. You could see a huge shift in the future if these new life settlement instruments really start to take off. Profits could go down drastically, premiums could rise, and firms that are "to big to fail" could be in trouble.



Dr. Tufte said...

How is this related to Chapter 1-3 in the text?

skylar said...

Dr. Tufte
This is related to Chapter 1-3 because of the supply and demand it will put in Life Isurance policies. This could cause a huge shift in the whole industry if these big companies have to start forking over money for insurance policies that usually laspe