Longevity Risk and Capital Markets: The 2014–15 Update

• Published date: 01 April 2017
• Date: 01 April 2017
• Author: Marco Morales,David Blake
• DOI: http://doi.org/10.1111/jori.12213

LONGEVITY RISK AND CAPITAL MARKETS:THE

2014–15 UPDATE

David Blake

Marco Morales

This Special Issue of the Journal of Risk and Insurance contains 11 contributions to the

academic literature all dealing with longevity risk and capital markets. Draft versions

of the articles were presented at Longevity 10: The Tenth International Longevity Risk and

Capital Markets Solutions Conference that was held in Santiago, Chile on September 3,

2014 to September 4, 2014. It was hosted by the Universidad Diego Portales, the

International Federation of Pension Fund Administrators (FIAP), the Chilean

Securities and Insurance Supervisor (Superintendencia de Valores y Seguros—

SVS) and the Pensions Institute, Cass Business School, City University London, U.K. It

was sponsored by AFP Habitat, Principal Financial Group, Prudential Financial, Inc.,

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erale Corporate and Investment Banking, the Society of Actuaries (SOA),

and the Insurers Association of Chile.

Longevity risk and related capital market solutions have grown increasingly

important in recent years, both in academic research and in the market we refer to as

the new Life Market, that is, the capital market that trades longevity-linked assets and

liabilities.

1

Mortality improvements around the world are putting more and more

pressure on governments, pension funds, life insurance companies, as well as

individuals, to deal with the longevity risk they face. At the same time, capital

markets can, in principle, provide vehicles to hedge longevity risk effectively and

transfer the risk from those unwilling or unable to manage it to those willing to invest

in this risk in exchange for appropriate risk-adjusted returns or to those who have a

counterpoising risk that longevity risk can hedge, for example, life offices and

reinsurers with mortality risk on their books. Many new investment products have

been created both by the insurance/reinsurance industry and by the capital markets.

David Blake is Professor of Pension Economics and Director of the Pensions Institute, Cass

Business School, City University of London. David Blake can be contacted via e-mail:

d.blake@city.ac.uk. Marco Morales is Associate Professor of Economics at the Universidad

Diego Portales. Marco Morales can be contacted via e-mail: marco.morales@udp.cl. David

Blake and Richard MacMinn are Co-Founders of the Longevity Risk and Capital Markets Solutions

Conferences.

1

Blake et al. (2013).

© 2017 The Journal of Risk and Insurance. Vol. 84, No. S1, 279–297 (2017).

DOI: 10.1111/jori.12213

279

Mortality catastrophe bonds are an example of a successful insurance-linked security.

Some new innovative capital market solutions for transferring longevity risk include

longevity (or survivor) bonds, longevity (or survivor) swaps, and mortality (or q-)

forward contracts. The aim of the International Longevity Risk and Capital Markets

Solutions Conferences is to bring together academics and practitioners from all over the

world to discuss and analyze these exciting new developments.

The conferences have closely followed the developments in the market. The first

conference (L1) was held at Cass Business School in London in February 2005. This

conference was prompted by the announcement of the Swiss Re mortality catastrophe

bond in December 2003 and the European Investment Bank/BNP Paribas/PartnerRe

longevity bond in November 2004.

The second conference (L2) was held in April 2006 in Chicago and hosted by the Katie

School at Illinois State University.

2

Since L1, there have been further issues of

mortality catastrophe bonds, as well as the release of the Credit Suisse Longevity

Index. In the United Kingdom, new life companies backed by global investment

banks and private equity firms were setting up for the express purpose of buying out

the defined benefit pension liabilities of U.K. corporations. Goldman Sachs

announced it was setting up such a buy-out company itself (Rothesay Life) because

the issue of pension liabilities was beginning to impede its mergers and acquisitions

activities. It decided that the best way of dealing with pension liabilities was to

remove them altogether from the balance sheets of takeover targets. So there was firm

evidence that a new global market in longevity risk transference had been established.

However, as with many other economic activities, not all progress follows a smooth

path. The EIB/BNP/PartnerRe longevity bond did not attract sufficient investor

interest and was withdrawn in late 2005. A great deal, however, was learned from this

failed issue about the conditions and requirements needed to launch a successful

capital market instrument.

The third conference (L3) was held in Taipei, Taiwan on July 20, 2007 to July 21, 2007.

It was hosted by National Chengchi University.

3

It was decided to hold L3 in the Far

East, not only to reflect the growing importance of Asia in the global economy, but

also to recognize the fact that population ageing and longevity risk are problems that

affect all parts of the world and that what we need is a global approach to solving

these problems.

4

Since the Chicago conference, there had been a number of new

developments, including: the release of the LifeMetrics Indices covering England &

Wales, the United States, Holland, and Germany in March 2007 by J. P. Morgan, the

Pensions Institute and Towers Watson;

5

the world’s first publicly announced

longevity swap between Swiss Re and the U.K. life office Friends’ Provident in

2

The conference proceedings for L2 were published in the December 2006 issue of the Journal of

Risk and Insurance.

3

The conference proceedings for L3 were published in the Fall 2008 issue of the Asia-Pacific

Journal of Risk and Insurance.

4

In fact, Asia has the world’s largest and fastest growing ageing population (United Nations,

2007).

5

www.lifemetrics.com

280 THE JOURNAL OF RISK AND INSURANCE