Longevity Indices

Paul Sweeting

A fall in real yields (such as that which has persisted throughout the 2010s) will serve to increase the focus on mortality and longevity risk for pension schemes and insurance companies. This is because it results in an increase in the capital required to hedge this risk. Therefore, it is important to ensure that sufficient capital will be attracted to enable mortality and longevity risk to be transferred. One way of helping this process is to encourage an element of standardisation, and longevity indices can be useful in this context. However, the use of longevity indices in transactions is not without its problems.

In this chapter we first consider mortality and longevity risk, decomposing these risks into their component parts. Next, we examine some of the mechanics of longevity and the ideal requirements of indices both in general terms and specifically for the transfer of mortality and longevity risk. The use of longevity index swaps in the transfer of risk is then explored. We then move on to discuss market initiatives with respect to longevity indices, and conclude with an assessment of some of the challenges of index-based transactions.

MORTALITY AND LONGEVITY RISK

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