Building a mature market

A Swiss Re report analyses the potential for building a capital market for longevity risk, which could form part of a wider solution towards funding people's longer lives.

With people living longer than previously expected, creating a framework to ensure that today's – and tomorrow's – retirees will receive income long into the future is one of the big challenges facing society. A part of any solution could be to create a liquid capital market where longevity risk – the financial risk that people live longer than has been budgeted for – is traded and there has been much debate over how this might work.

Detailed analysis

With this in mind, Swiss Re's report, "A mature market? Building a capital market for longevity risk," (PDF, 2.83 MB) provides a fascinating insight into the challenges and the steps towards achieving this goal. It answers numerous questions, such as the extent to which shareholders are already exposed to longevity risk and who the market's investors might be.

Including case studies of previous markets – such as the inflation market – as well as analysis of successful longevity capital market transactions, it provides both sides of the debate. The content contains interviews with potential investors who have differing opinions over the extent to which a longevity market is a realistic vision.

A home for pension plans?

One of the key questions is whether pension plans would access a capital market directly. Because most pension funds are extremely small in comparison to the overall population, it seems that they would more likely favour an indemnity solution. This would completely remove the risk from their balance sheet and pass it onto a third party, such as an insurer or a reinsurer (re/insurers).

As the insurance industry appears to be the "natural home for longevity risk," re/insurers should accumulate the risk through providing indemnity solutions to individuals and pension funds. In order to continue providing such solutions long into the future, a capital market could offer a risk-sharing solution for society that allows re/insurers to provide more capacity for risk.

The way forward

"A capital market could be vital for the insurance industry in the long term," explains Alison Martin, Head of Life & Health Reinsurance at Swiss Re. "As the scale of the risk is so vast, capacity is unlikely to meet the future demand for longevity risk solutions without the involvement of the capital markets.

"A liquid market would form a part of an overall solution," concludes Martin, "and we must work together as an industry, as well as with other stakeholders in society, to create a system that is sustainable throughout people's longer lives."

Published 24 September 2012

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