Abstract
Still Living with Mortality: The Longevity Risk Transfer Market after One Decade
Highlights
Consultancies tend to have fairly streamlined processes for running off stochastic projections in order to illustrate the magnitude of each element of the longevity risk; these would typically be based on simplified pension benefits but would reflect the most important aspects of the scheme, such as membership age, gender, and pension amounts
With investors increasingly monitoring the size of defined benefit (DB) liabilities and the effects on company share prices, profits and dividends, the International Monetary Fund (IMF) said offloading these liabilities to insurers “is an attractive option” and “may represent a market-efficient arrangement” and that “regulation could play an important role in this area by facilitating such transactions.”
It becomes painfully obvious that vast sums of additional risk capital must be dedicated to adequately managing longevity risk
Summary
A little over a decade ago, the longevity risk transfer market started. This is a global market, but it began in the UK in 2006. Swiss Re pioneered the successful issuance of a longevity-spread bond, known as Kortis, but again the size of the issue was small. The demand for the capital market solutions that have been proposed for hedging longevity risk has been disappointingly low. Pension plan trustees, sponsors and advisers preferred dealing with risk by means of insurance contracts which fully removed the risk concerned and were not yet comfortable with capital market hedges that left some residual basis risk
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