Life Settlement Funds: Current Valuation Practices and Areas for Improvement

We analyse the prevailing valuation practices in the settlement industry based on a sample of eleven funds that cover a large fraction of the current market. The most striking result is that a majority of asset managers seems to substantially overvalue their portfolios relative to the prices of recently closed comparable transactions. Drawing on market-consistent estimates with regard to medical underwriting, it is possible to trace back the observed discrepancies to inadequately low model inputs for life expectancies and discount rates. The consequences are a dissimilar treatment of investor groups in open-end fund structures as well as an unduly high compensation for managers and third parties. To address this predicament, we suggest defining life settlements as level 2 assets in the fair value hierarchy of IFRS 13, improving transparency and disclosure requirements, and developing new incentive compatible fee structures.