Life settlements, a type of life insurance-backed security, should not be compared to the failed subprime-backed products associated with the credit crunch, according to an industry body, responding to media reports.

In recent weeks several newspapers have reportedly speculated that life settlements will form a new powerful trend in the securitisation market, which has encouraged some commentators to compare this with the securitisation of high-risk mortages in the US in recent years.

Life settlement securities are backed by US life insurance policies that have been sold by the policyholders for cash to a financial institution. The institution aims to profit from the policy payout when the life assured dies.

The sector has been driven by the desire of people such as the terminally ill to unlock the value of their policies when they can still make use of the money. Investment firms operating in this sector say returns are steady and have low correlation with equity markets, making this asset class ideal for cautious investors seeking steady returns.

In a statement, however, the European Life Settlement Association said comparisons with mortgage-backed securities were nonsense, arguing that life settlements were driven by different factors than mortgages.

"Suggesting life settlements are the new subprime scandal is simply an exercise in sensationalism by the media," said Patrick McAdams, co-Chairman of ELSA.

"There are risks in life settlements, principally relating to life expectancy, potential advances in healthcare, and liquidity to pay premiums,” he said.

"However, these can be well managed through rigorous actuarial modelling of returns, highly diversified fund portfolios in terms of profile and geography of policy, and conservative fund management," he added.