LLMA launches documentation to further standardisation of the longevity risk transfer market

by Artemis on November 1, 2010

Further to our previous post earlier today about the new standardised swaps that the Life & Longevity Markets Association are aiming to introduce, we now have further details on these efforts to standardise deal structures from the LLMA.

A series of technical publications have been published which describe the results of the LLMA’s work looking at how to create market standard approaches to both the definition of longevity risk transfer instruments and to the pricing of longevity risk exposure.

The LLMA says the standards will facilitate development of a liquid, traded market in longevity risk transfer, encourage greater consistency in transactions and encourage best practice among market participants. They hope this will make it easier for first-time counterparties to enter the market, feel comfortable with the options available to them and reduce time spent on due diligence for longevity risk transfer transactions.

The publications include details of a ‘Longevity Pricing Framework’ which deliver a much needed ‘standard approach with which market participants can calculate benchmark prices for longevity exposures and hedging instruments for the purposes of comparison and communication’. This framework gives market participants a great format from which to work out pricing of instruments, particularly useful for comparison purposes. The LLMA stress that this is just a framework to provide a best practice approach to achieve this.

The other publications involve the two specific longevity swap structures (q-forwards and s-forwards) which aim to clearly document two specific instruments which can be used for longevity risk transfer. Sample term sheets and technical documents describe these instruments at length which should be extremely useful for potential market participants. The q-forward is a mortality forward rate contract and the s-forward is a survivor forward rate contract. The LLMA says these instruments represent simple building blocks from which more complex deal structures can be devised. As an example, the LLMA cite existing pension fund and insurer longevity derivative swaps as essentially equivalent to a string of S-forwards with different maturity dates.

Guy Coughlan, Chair of the LLMA Technical Committee, and spokesperson for the LLMA (and Managing Director at J.P. Morgan) commented: “The LLMA is pleased to make these new publications available to the market to promote further standardisation and foster the development of liquidity. Our Technical Workstream has worked hard over several months to create these documents with substantial input from our members, who represent leading active participants in the longevity market. Over the nine months since its launch, the LLMA has made tremendous progress on several fronts. In addition to these new documents we have also grown our membership and published for market consultation a longevity index framework, the results of which will be announced shortly.”

The documentation can all be downloaded from the LLMA website.

The LLMA is making good progress on its mission to aid standardisation and transparency in the longevity risk transfer market. These documents combined with the results of their longevity index consultation will go a long way towards these goals and will help to enable this liquid market in risk transfer to develop, particularly secondary market trading.

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