Wednesday, June 16, 2010

A.M. Best Introduces Life Settlement Simulation Model

A.M. Best, Oldwick, N.J.has announced a life settlement simulation model called ‘Best’s Life Settlement Cash Flow Model. The model is now available for free download at Settlement Model .

The model is an analytic tool that will help entities that have accumulated pools of policies to better understand the stochastic nature of mortality-based cash flows, says Emmanuel Modu, Best’s managing director & global head of insurance-linked securities. While investment banks have their own simulators, other investors will find this tool useful, he says.

For instance, Modu explains that often joint lives policies are not assessed correctly with investors simply looking at higher life expectancy reports.
The benefit of this tool is that it is a middle step that helps investors determine whether they want to proceed with a rating, he continues.

Modu says that the model doesn’t replace the need for LEs since medical underwriting is an input needed to determine the mortality-based cash flows.

A Webinar will be held on July 22 to help users better understand the model, according to Modu.

The model offers a monthly reading of death benefits and premiums for a pool of policies using mortality rates based on gender and smoking status; mortality ratings provided by medical underwriters; and duration to calculate cash flows associated with a life settlement portfolio.

Specifically, the model quickly generates:
--up to 5,000 simulations of death benefits and premium payments on up to 1,000 life settlements (including life settlements based on “second-to-die” insurance policies) using the Monte Carlo statistical methodology;
--expected death benefits and expected premiums for each life settlement using the probabilistic approach;
--a monthly mortality rate vector associated with each life settlement; and
--a graph of portfolio expected cash flows.

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