Actuaries and underwriters working in Bermuda's life insurance sector use statistics and graphs every day in order to assess the likelihood of death.

But now top investment banks are doing so, too, as they assess the risk of investing in life insurance policies.

Over the last two centuries, life expectancy in the western world has accelerated.

In the 1840s, for example, the average life expectancy was 40, but today we can expect to live to 80 — and we can expect our grandchildren to live even longer.

While the idea of lengthening life spans might sound a wonderful prospect, it can create a problem for society at large.

Governments are encouraging elderly citizens not to rely on the younger members of their families for their upkeep and to instead save money to protect themselves, for example by investing in a life insurance policy.

The Life Act 1978 (the "Life Act") applies to all life insurance contracts made in Bermuda unless the parties agree that another law shall apply.

Based upon the definition of life insurance under the Life Act, there is a requirement that insurance money be paid:

? on death; or

? on the happening of an event or contingency dependent on human life; or

? at a fixed or determinable future time; or

? for a term dependent on human life.

However, in order to invest in a life insurance policy or even a pension, investors must engage in a guessing game regarding an individual's life expectancy.

That guessing game is something bankers have become adept at, and now companies such as Goldman Sachs, Deutsch Bank and ABN Amro are using those skills and the financial markets to engineer ways to invest in policy holders' longevity.

Insurers have, of course, prepared for longer life expectancies.

If somebody died, thereby activating a policy, the payout was met by premiums paid by living policyholders.

Similarly, if an annuity holder survived for a long time, this was historically balanced out by the deaths of other pensioners.

In other words, early and late deaths balanced each other out. The life assurance business expanded quite lucratively in the 20th century.

However, just before 2000 not only was longevity increasing, it was doing so rapidly.

For insurance companies that run both life assurance and pension plans the problem was manageable since, if people live longer, they pay more into their life insurance policies.

However, more stand-alone pension funds were finding themselves in adverse positions.

Some companies had to pay more into their pension scheme or alternatively buy financial instruments to protect themselves from future inflation.

Many companies are now turning to investment banks to assist them with their longevity risks.

Financial trends show that bankers can turn longevity into a successful investment.

Experts see similarities with the Goldman Sachs invention, the 'cat bond', which sees an insurance company write policies protecting the policyholder against catastrophes while at the same time issuing a bond to a third party.

Premiums collected from policyholders are used to pay bondholders' income. In the event a catastrophe occurs then the bondholder stops receiving income and the policyholder's claim is paid and hence the bank shares its risk with the bondholder.

Bond purchasers, willing to bet against catastrophe, are now being asked to bet against longevity.

For example, the French insurance group AXA issued a 'mortality bond' in relation to pandemics, such as the bird flu.

The use of life insurance policies as a security has also become a well-established practice.

But, in Bermuda, other factors come into play in relation to the sale of life policies in and from within the Island.

The Bermuda Monetary Authority (BMA), which regulates insurance business in Bermuda, has frowned upon the sale of Viaticals, which are life insurance policies issued where the policyholder has a terminal illness.

However, the BMA has indicated that it might not disapprove of situations where life insurance policies are invested in, rather than sold.

Interestingly for investors, these derivatives could fall outside the ambit of the Life Act by being classed as an investment contract under section 57A of the Insurance Act 1978.

If the relatively onerous Life Act is found not to apply to such contracts, investors may find them even more attractive.

Rebecca Moses is an attorney on the Insurance Team within the Corporate/Commercial Practice Group at Appleby. A copy of Ms Moses' column can be found on the Appleby website at www.applebyglobal.com.

This column should not be used as a substitute for professional legal advice. Before proceeding with any matters described herein, persons are advised to consult with a lawyer. No company referenced in this column has endorsed this article.