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 customized 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 recognize 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.

Keywords: Buy-Outs; Buy-Ins; Longevity Insurance; Longevity Bonds; Longevity Swaps; q-Forwards; Tail-Risk Protection; Basis Risk; Credit Risk; Regulatory Capital; Collateral; Liquidity; Stochastic Mortality Models; Longevity Risk Premium; Longevity-Linked Securities; Reinsurance Sidecars

JEL Classification: G15; J11