Macquarie University associate professor Jackie Li says there are traditionally three ways of managing longevity risk: by passing it on to the resinsurer, through natural hedging by selling a combination of both life insurance and annuities, or by accessing the capital market.
Dr Li said increasing life expectancy will pose a significant challenge to life insurers in managing longevity risk, and his research project investigates the possibilities of using the capital market to better manage it.
“If life insurers can have a good way to get to the capital market, then they can pass on the risk to somebody else willing to take it and then, in turn, they can offer more products,” he told Risk Adviser.
“They would be more comfortable to take on more longevity risk and they can provide more products to the general public.”
Dr Li said that there have been problems around where to pass on longevity risk, as there are very few products in the market as insurers and reinsurers are not willing to take on too much longevity risk.
He suggests that, just like futures, options and forwards in financial markets, there could be something similar in the longevity market.
“We could create something like a longevity index, and then create some tools like longevity bonds, swaps, options and forwards around this index,” Dr Li said.
“If this market is developed and becomes feasible, then insurers, reinsurers and pension funds can pass risk around easily to those who are willing to take it.”
Mr Li said he expects to complete the research in April or May next year.
This article talks about the idea of having ‘longevity’ as a new asset class, being broadly uncorrelated with the traditional asset classes such as stocks and currencies. You can find more details in http://www.llma.org/. Hope this helps.
Can someone please explain the thrust of this article to me in plain English?
Hahahahah omg.. so the answer is to kick the can to someone else on the “market”. Surely that capital market provider is going to price that risk or blow up in the process. I vaguely remember some bright idea to deal with declining mortgage quality by packaging it up and putting it on the capital markets. You could do that, and then bet against it. Genius!