Research will attempt to understand basis risk in longevity risk transfer

by Artemis on March 3, 2013

The Life & Longevity Markets Association (LLMA), an association formed to provide a forum for market participants to collaborate on issues related to the transfer of longevity risks, and the Institute and Faculty of Actuaries have teamed up to run a research project looking into basis risk for longevity risk transfer transactions. A call for proposals and partners to assist with developing an industry benchmark for understanding longevity basis risk has been made.

The project’s goal is to develop a robust methodology to quantify the basis risk associated with using population level mortality indices for managing the longevity risk in pension benefits or annuitant liabilities.

The LLMA expects the results of this project to be beneficial to a wide variety of organisations and individuals, including pension schemes and their members as well as insurance companies which write annuity business. Both those who are exposed to longevity risk as well as those who desire to invest in it will benefit from a new methodology for quantifying risk related to longevity.

Dan Ryan spokesperson for the LLMA commented; “The LLMA believes that this project will help to develop market clarity and support the LLMA’s brief to grow this marketplace. It is a high profile opportunity for the successful party to provide a practical solution to a real industry problem and in doing so greatly enhance opportunities for longevity risk transfer to the capital markets.”

Sarah Mathieson, Policy Manager at The Institute and Faculty of Actuaries added; “In the context of a longevity hedge, longevity basis risk is the potential mismatch between the behaviour of the longevity hedge and the portfolio of pensioners or annuitants being hedged, when the hedge has been based on a generic mortality index rather than the actual pool of lives in the pension scheme or annuity book. This project aims to develop a methodology to quantify the risk, which we believe will benefit a range of parties involved in pensions, from scheme sponsors to scheme members, as well as writers of annuity business.”

Those who apply will be considered to perform the research project and applications must be received by 15th April 2013 with the research work to be completed within 12-18 months. The successful party will assist with the ongoing aim of the LLMA, to facilitate the transfer of longevity risks to the capital markets. The successful applicant will be accountable to the Longevity Basis Risk Working Group, who will closely monitor the progress of the research to ensure that it continues to lead to the desired outcome.

More details on the project and an invitation to tender form can be downloaded via the LLMA website here.

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