Legal Commentary

Death-Bet Insurance

By Kenneth Anderson

Death-bet insurance involves a person taking out life insurance, and then turning around and selling the policy to a stranger ? a hedge fund, for example, via intermediaries ? who pays the premiums and collects after the insured?s death.  Growing in popularity as a system of side-bets on the insurance markets, it has also been controversial particularly as it raises questions about whether it violates the rule of having an insurable interest.  On the other hand, it puts a bundle of immediate cash into the old person?s hands.  The overall investor problem is that if the insured person does not die on schedule, then the investor has the double-whammy of having to wait for payout and pay premiums in the meantime or lose the payout.

Insurance companies have been suing the third party investors, the investors have been countersuing the insurance companies, and in some cases, relatives of the deceased insured have been suing to claim that the insurance proceeds really belong to them.  There have been several articles in the WSJ and elsewhere describing the contests that have arisen particularly as the business model has been under pressure on account of bad actuarial assumptions about how long the insureds would live.  There is a good piece on the whole litigation mess in today?s WSJ:

The life-policy secondary market was one of many sent reeling by the global financial crisis of 2008-09, but it also has been hurt by revised actuarial tables, which show older people living longer, and the mounting litigation.

Apart from several hundred suits that have been filed by insurers, suits also have been filed by relatives of some of the deceased elderly, alleging that death benefits belong to the family members.

With much of the litigation in early stages, legal experts say it is unclear how effective investors? new counterattacks will be. Investors could face big losses if policies in their portfolios are canceled, leaving them with nothing to show for their expenditures.

I?m unclear whether this was a side bet industry that depended upon easy money in the bubble or whether it is something that, with a sufficiently revised actuarial model, could survive as a means by which elderly people could cash out while still alive.

What about the insurable interest requirement?  I suppose one could say it?s irrelevant, so long as the stranger-investors have no way to affect the insured?s life and health, and allowing stranger-insurance adds liquidity to the insurance pool.  But I suppose one could also say that there can be peculiarly unanticipated consequences of giving significant groups of stranger-investors interests in one event only ... the death of the insured.

But I?d be curious what others think.  Don?t just tell me about freedom of contract and all ? what might be the unanticipated consequences of relaxing an apparently irrelevant insurable interest rule?

Full post as published by The Volokh Conspiracy on January 04, 2011 (boomark / email).