JP Morgan Chase & Co. has announced that they’ve taken on an unnamed UK insurers exposure to life expectancy risk in a deal valued at £500m ($901m). This is the latest in a string of recent moves by life insurers to offload their risk to others.
Longevity swaps allow companies such as insurers and pension funds to manage the risk of life expectancy increasing by offloading to a counterparty who will pay the pensions. In return the counterparty gets payments based on future pension payments worked out with an assumed increase in longevity. This allows the insurer or pension fund to at least know their liabilities given that life expectancy in the future may be uncertain.
The counterparty will then place the swap with investors, in this case investors (such as hedge funds) who are happy playing markets such as insurance linked securities and cat bonds.
With investors seemingly keen to find uncorrelated investments to put their funds in the time is ripe for more of these deals.