Still living with mortality: the longevity risk transfer market after one decade

Abstract

This paper updates Living with Mortality published in 2006. It describes how the longevity risk transfer market has developed over the intervening period, and, in particular, how insurance-based solutions – buy-outs, buy-ins and longevity insurance – have triumphed over capital markets solutions that were expected to dominate at the time. Some capital markets solutions – longevity-spread bonds, longevity swaps, q-forwards and tail-risk protection – have come to market, but the volume of business has been disappointingly low. The reason for this is that when market participants compare the index-based solutions of the capital markets with the customised solutions of insurance companies in terms of basis risk, credit risk, regulatory capital, collateral and liquidity, the former perform on balance less favourably despite a lower potential cost. We discuss the importance of stochastic mortality models for forecasting future longevity and examine some applications of these models, e.g. determining the longevity risk premium and estimating regulatory capital relief. The longevity risk transfer market is now beginning to recognise that there is insufficient capacity in the insurance and reinsurance industries to deal fully with demand and new solutions for attracting capital markets investors are now being examined – such as longevity-linked securities and reinsurance sidecars.

Forecasting Mortality Trend of Indonesian Old Aged Population with Bayesian Method

“…The standard deviations are determined by looking at the naturally-log form of the ratio between 97.5-percentile to 2.5-percentile for every prior distribution of α0, β0, and ϛ0. Thus, we express the fiveyear abridged rates for the pooled model as (12). 5# , , ,g = 1 − exp &−5' $ ( ) *( + + *( , *( -+ *( A g /0 × exp &−5'− $ . )…”

“…The mortality risk charge compensates the insurer for any losses as a result of the death of the policyholder [3]- [5] and affecting insurer's surplus [6]- [11]. While longevity risk exposes insurance companies to the chance that they have greater-than-anticipated cash flow needs on pension funds [12]- [15] and even those who were involved with longevity risk in Europe and North America started to increase their participation in the longevity risk transfer market rapidly [16].…”

Longevity trend risk over limited time horizons

“…A relatively recent financial innovation for managing longevity risk is the index-based hedge. Several such hedges have been transacted in recent years by insurers in the Netherlands; see Blake et al (2018) for an overview. The basic idea is that the owner of longevity risk, e.g., an insurer or pension scheme, uses a hedging instrument defined with reference to population mortality.…”

On the economics of the longevity risk transfer market

“…Subsequently, in the second link of this chain, selected longevity risk components are further passed on to the capital markets through an index‐based hedge. Since then, this concept has been taken up in several studies, including Blake et al (2019), Cairns and El Boukfaoui (2021), and the references cited therein. However, previous studies are either limited to qualitative descriptions and discussions of a functioning longevity risk transfer market or solely focus on one link of this risk transfer chain, that is, on transactions between a longevity hedger and a hedge provider who is typically left unspecified (see, e.g., Börger, Freimann, et al, 2021; Cairns et al, 2014; Cairns & El Boukfaoui, 2021; Meyricke & Sherris, 2014; Ngai & Sherris, 2011).…”