Life & Longevity Markets Association aiming to standardise longevity swaps

The non-profit trade organisation set up to address issues within the growing longevity risk transfer market, the Life & Longevity Markets Association, is working on a set of standardised longevity swap contracts to help propel the market forwards.

Due to publish a set of documents today about this work stream the association is seeking to create standardised contracts which could be more swiftly set up and used by companies wanting to transfer their longevity risk exposure. Currently arranging longevity swap deals can take significant time to get the finer details correct.

The two contract types are being called q-forwards and s-forwards. The idea behind them is to have a structure in place that companies can arrange a deal around. It would also mean companies seeking to hedge their longevity risk could compare prices between service providers and be confident in what they are getting for their money.

A market in these standardised contract structures could appear allowing secondary trading in longevity risks. This could open the market up to investors and allow banks to trade the swaps between each other. All of this is positive movement towards a liquid market in longevity risk.

As with any standardised contract they do have their draw backs. The contracts are modelled based on national population statistics rather than the profile of a particular book of life insurance or members of a pension scheme. This means that assumptions cannot be as accurate. However there is still a strong correlation between national mortality and longevity rates and those of any defined group of people meaning that the swaps will still be of use to companies seeking to hedge general longevity risks.

We’ll bring you an update on this when the documents are published and we have further information.