Vose SoftwareModelChoice decision tree · Insurance
Life Insurance Portfolio Acquisition
Buy a large or a small block of life policies, invest through a fund, or not invest?
From the model’s decision tree
Best first decision: Buy Large Portfolio (1000)
The expected value of each first option when every later decision is also made well (the tree rolled back).
| First decision | Expected value | |
|---|---|---|
| Buy Large Portfolio (1000) | $27,750,000 | ✔ best |
| Buy Small Portfolio (200) | $2,525,000 | |
| Participate in Fund | $2,902,500 | |
| Don't Invest | $0 |
| Measure | Value |
|---|---|
| Expected value of the best strategy | $27,750,000 |
| Chance of a loss on the best strategy | 40.0% |
| Best outcome on the best strategy | $200,000,000 |
| Worst outcome on the best strategy | −$140,000,000 |
S-curve (cumulative probability) of Buy Large Portfolio (1000) from the saved simulation.
The decision
An investment firm specializing in insurance-linked assets is evaluating the acquisition of a block of life insurance policies (life settlements). The firm would purchase policies from seniors at a discount to face value, pay ongoing premiums, and collect death benefits. Returns depend on how quickly insured individuals pass away relative to actuarial projections.
Objective
Maximize expected net return over a 10-year horizon. Key uncertainties: mortality experience vs actuarial tables, interest rate movements (affect discount rates and premium financing costs), and regulatory changes.
The options
- Option 1: Buy Large Portfolio - 1000 Policies ($200M)
Purchase a diversified block of 1000 policies with $1.2B aggregate face value. Better diversification but massive capital commitment. If mortality is much better than expected (people live longer), a hold-or-sell decision follows.
- Option 2: Buy Small Portfolio - 200 Policies ($45M)
Purchase a smaller block of 200 policies with $250M face value. Less capital at risk but higher concentration risk and less diversification benefit.
- Option 3: Participate in Fund ($10M commitment)
Invest as a limited partner in a life settlement fund managed by specialists. Lower risk but also lower return; manager takes 2/20 fees.
- Option 4: Don't Invest
Pass on the opportunity. No risk, no return.
The decision tree
The tree has 2 decisions, 12 chance events and 32 outcomes. The best path is open: at every decision the best choice is marked, and the expected value beside each branch counts every cash flow from the start. Open any other branch to see what follows it.
DecisionChance event+$ cash flow on the branch
Buy Large Portfolio (1000) −$200,000,000expected $27,750,000 ✔ best
Chance: Mortality Experience15% Much Better (Live Longer)expected −$140,000,000
Decision: Longevity Risk: Hold or Sell?Hold and Waitexpected −$153,800,000
Chance: Interest Rate Environment35% Rates Rise (Helps)expected −$118,000,000
Chance: Regulatory Changes- 30% Favorable Regulation +$120,000,000payoff −$80,000,000
- 50% No Change +$80,000,000payoff −$120,000,000
- 20% Adverse Regulation +$30,000,000payoff −$170,000,000
- 40% Rates Stable +$50,000,000payoff −$150,000,000
- 25% Rates Fall (Hurts) −$10,000,000payoff −$210,000,000
- Sell at Loss +$60,000,000payoff −$140,000,000 ✔ best
25% Better Than Expectedexpected −$56,000,000
Chance: Interest Rates (Better Mort.)- 35% Rates Rise +$180,000,000payoff −$20,000,000
- 40% Rates Stable +$140,000,000payoff −$60,000,000
- 25% Rates Fall +$100,000,000payoff −$100,000,000
35% As Expectedexpected $75,000,000
Chance: Interest Rates (Expected Mort.)- 35% Rates Rise +$320,000,000payoff $120,000,000
- 40% Rates Stable +$270,000,000payoff $70,000,000
- 25% Rates Fall +$220,000,000payoff $20,000,000
25% Worse (Die Sooner)expected $146,000,000
Chance: Interest Rates (Worse Mort.)- 35% Rates Rise +$400,000,000payoff $200,000,000
- 40% Rates Stable +$340,000,000payoff $140,000,000
- 25% Rates Fall +$280,000,000payoff $80,000,000
Buy Small Portfolio (200) −$45,000,000expected $2,525,000
Chance: Mortality Experience- 15% Much Better (Live Longer) +$15,000,000payoff −$30,000,000
25% Better Than Expectedexpected −$14,500,000
Chance: Interest Rates (Better Mort.)- 35% Rates Rise +$40,000,000payoff −$5,000,000
- 40% Rates Stable +$30,000,000payoff −$15,000,000
- 25% Rates Fall +$18,000,000payoff −$27,000,000
35% As Expectedexpected $11,500,000
Chance: Interest Rates (Expected Mort.)- 35% Rates Rise +$70,000,000payoff $25,000,000
- 40% Rates Stable +$55,000,000payoff $10,000,000
- 25% Rates Fall +$40,000,000payoff −$5,000,000
25% Worse (Die Sooner)expected $26,500,000
Chance: Interest Rates (Worse Mort.)- 35% Rates Rise +$85,000,000payoff $40,000,000
- 40% Rates Stable +$70,000,000payoff $25,000,000
- 25% Rates Fall +$55,000,000payoff $10,000,000
Participate in Fund −$10,000,000expected $2,902,500
Chance: Fund Performance- 15% Mortality Much Better +$3,000,000payoff −$7,000,000
- 25% Mortality Better +$8,000,000payoff −$2,000,000
35% Mortality As Expectedexpected $4,150,000
Chance: Interest Rates (Fund)- 35% Rates Rise +$18,000,000payoff $8,000,000
- 40% Rates Stable +$14,000,000payoff $4,000,000
- 25% Rates Fall +$9,000,000payoff −$1,000,000
- 25% Mortality Worse +$22,000,000payoff $12,000,000
- Don't Investpayoff $0
Change the numbers. Open the workbook with ModelChoice, change a probability or a cost in the tree, and the best decision updates at once.
Key assumptions
| Assumption | Value | Notes |
|---|---|---|
| Large Portfolio Cost | $200,000,000 | 1000 policies, $1.2B face value |
| Small Portfolio Cost | $45,000,000 | 200 policies, $250M face value |
| Fund Commitment | $10,000,000 | LP interest, 2/20 fee structure |
| Much Better Mortality | 15% | Insureds live much longer than expected |
| Better Mortality | 25% | Insureds live somewhat longer |
| Expected Mortality | 35% | Matches actuarial projections |
| Worse Mortality | 25% | Insureds die sooner (higher returns) |
| Interest Rate Rise Prob. | 35% | Increases discount rate |
| Max Upside (Large) | $120,000,000 | Worse mortality + rising rates |
| Max Downside (Large) | −$40,000,000 | Much better mortality + rates fall |
The figures are illustrative: the companies and numbers are invented for teaching.
Try it in ModelChoice
- Strategy Table. Compare large vs small portfolio vs fund participation
- Sensitivity Analysis. Impact of mortality deviation and interest rates on NPV
- Risk Profile. Longevity risk and the hold-or-sell decision
Find similar models
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Further reading
Download the workbook and open it with ModelChoice. The free trial opens every example.
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An illustrative example: the figures are invented for teaching. Last updated 9 October 2026.