Longevity Risk Transfer

Abstract

Longevity is one of the greatest risks threatening the stability of our society. An anti-ageing breakthrough that slowed down our biological clocks would cause profound challenges for our society, particularly if it was a quick and cheap intervention. The adjustment would be difficult for politicians: many countries operate pay-as-you-go state pension systems, with the current generation of workers paying for the pensions of the retired generation. Increased expectations of life expectancy require tax rises, later retirement ages or cuts to pensions in payment. The unpopularity of this economic medicine is believed to be one of the reasons why governments have habitually underestimated the scope for improvements in life expectancy, so we are currently playing catch-up with belated increases to state pension ages. The lack of preparedness for further increases in life expectancy risks could trigger a global economic recession, with the natural reaction of older people being to hoard their savings, causing a reduction in consumer demand. So, there is both an opportunity and a need for innovation to build corporate and societal resilience to longevity risk. Valuable lessons are being learned from the development of other exotic commodities—like credit risk and catastrophe bonds—to shape the new longevity trading market. In this chapter, we explore sources of longevity risk; properties of longevity risk; why organisations wish to cede longevity risk; why organisations wish to acquire longevity risk; how longevity risk is currently transferred; the lessons learned from the journey to date; and the future for longevity risk transfer.

The authors wish to thank their colleagues Gayle Brown, Nick Chadwick, Theresa Chew, Scott Macpherson, Emma McWilliam, Iain Pearce, Andrew Scottand Richard Wellard for their assistance in producing this chapter.