A new association has formed to transfer longevity and mortality-related risk to the capital markets in the same way that some of the world's biggest perils, such as hurricanes and earthquakes, are protected against by shifting the risk to investors via catastrophe bonds.
The Life and Longevity Markets Association (LLMA), made up of a consortium of banks, insurers and pension experts, will develop a series of standardised indices that can be used as a global benchmark for trading longevity and mortality risk. The risk will be traded as swap structures initially, but as the market develops, longevity bonds will be created to transfer the risk, much like transactions such as cat bonds in the insurance-linked securities (ILS) market and other large trend risks like interest rates and inflation.
Traditionally, longevity was owned by pension funds and transferred in the form of buy-ins and buy-outs to pension insurers, who then underwrite price specific pension fund risk. But the LLMA want to transfer the UK's 2 trillion pounds ($3.3 trillion) pension liability assets to the capital markets to help pension schemes and insurers manage the financial pressure of increased life expectancy.
Dramatic increases in life expectancy have left private sector pension funds and annuity providers with massive exposure to longevity, and there are few options currently available to hedge this risk on any significant scale within the private sector.
In the last three years, around 19.5 billion pounds of longevity risk has moved over from the pension funds to the pension insurers, which is a small amount compared to the total assets in the UK, John Fitzpatrick, a director of the LLMA and a partner at Pension Corp, said.