Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Lack of a reference price hinders longevity risk market


Yesterday, we wrote about the new report from Swiss Re which discusses the role of state governments in insurance and the role that insurance-linked securities have to play in financing the risks that they face. The report also discusses the longevity risk issue and the role that governments could play in helping to establish a more liquid market for longevity risk transfer.

Swiss Re says that a bond market for longevity risk would greatly facilitate the ability of both public and private pension schemes to manage and diversify their longevity risk, but to date only one longevity bond has been issued. The potential market for longevity risk is huge, with assets under management at pension funds estimated to total $25 trillion.

One of the reasons for the limited success so far of transferring longevity risks to the capital markets through bonds (essentially catastrophe bond type structures) is the lack of a reference price for longevity risk, says Swiss Re. They suggest that governments could help to establish a market, which would in turn allow for more accurate pricing of longevity risk.

Swiss Re says that governments could, given their large and diverse longevity exposure, issue longevity-linked bonds to encourage the development of a market. They say that this would allow private investors to participate in the longevity risk market and would thus enable private companies to begin offering similar products as they would have a reference for pricing.

Other initiatives have been started to provide longevity indices to assist with pricing but as yet the market has not seen the success that some had expected from it. Given the size of the exposure, longevity is a natural fit for the capital markets as that is the only source of capital considered to be large enough to assume these risks.

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