Capital Markets and Longevity Risk Transfer

Guy Coughlan and Pretty Sagoo

Longevity risk – the risk that life spans exceed expectation – has been the focus of much attention for defined-benefit pension plans and life insurers with large annuity portfolios. Until 2008, the only way to mitigate longevity risk was via an insurance solution: a transaction in which pension plans typically bought annuities from, or sold their liabilities to, insurers that then bought reinsurance. In 2008 this began to change, when the first capital markets solutions for longevity risk management were executed by Lucida and Canada Life in the UK. Both transactions were significant catalysts for the development of the longevity risk transfer market, bringing additional capacity, flexibility and transparency to complement existing insurance solutions. Since then, the longevity market has transformed and has been subject to a rollercoaster of twists and turns. In this chapter we shall look at the major developments, especially with regards to non-standard longevity insurance, and the drivers of that market. The topics we shall cover are:

    • summary of the longevity market;

    • market participants;

    • methods of hedging longevity;

    • longevity indices;

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