Using Life Extension-Duration and Life Extension-Convexity to Value Senior Life Settlement Contracts

Investments in senior life settlements are marketed as securities that are uncorrelated with assets traded on other markets such as real estate, commodities, corporate equities and risky debt. In this article the authors develop a metric that can be used to evaluate the sensitivity of the value of a life settlement contract and portfolios of life settlement contracts with respect to longevity risk. Longevity risk in the context of life settlement contracts is the possibility that a person covered by a life insurance policy lives longer than the purchaser of the policy has forecasted. A fund manager can sort policies by using the life expectancy duration and convexity metrics that are developed to select policies that will increase the likelihood that a fund of life settlement contracts attains its target rate of return.