Longevity Risk and Capital Markets: The 2014–15 Update

This Special Issue of the Journal of Risk and Insurance contains 11 contributions to the academic literature all dealing with longevity risk and capital markets. Draft versions of the articles were presented at The Seventh International Longevity Risk and Capital Markets Solutions Conference (Longevity Seven) that was held in Frankfurt on September 8-9, 2011. It was hosted by the House of Finance at the Goethe University, Frankfurt, and the Pensions Institute. It was sponsored by the BVI (Bundesverband Investment und Asset Management), Commerzbank Corporates & Markets, Deutsche Borse: Market Data & Analytics, Ernst & Young, Fidelity International, and Hannover Re. The aim of the International Longevity Risk and Capital Markets Solutions Conferences is to bring together academics and practitioners from all over the world to discuss and analyze these exciting new developments. As with the previous conferences, (1) Longevity Seven consisted of both academic papers and more practical and policy-oriented presentations. The conference was addressed by the following keynote speakers: * James Vaupel (Director of the Max Planck Institute for Demographic Research) in a presentation entitled "Longer and Longer Lives" pointed out that in recent decades remaining life expectancy at age 65 has been steadily rising--at about 4-5 hours/ day in the countries doing best. As life expectancy increases, the healthy span of life is increasing at about the same pace. If improvements continue--and there is no sign of any looming limit--then most children born since the turn of the century in countries with high life expectancy will celebrate their 100th birthday. Clearly, this will have significant implications for global pension systems. * Ivan Zelenko (World Bank) described the World Bank's attempt to issue a longevity bond in Chile in 2009 in a talk entitled "Longevity Bonds and the Financial Stability of Retirement Systems." Despite the fact that the proposed longevity bond not only hedged systematic longevity risk but also provided a return over government bonds, Chilean annuity providers refused to buy the bond and so the bond was not launched. Their explanation was that they did not need to buy the bond because they knew the government--in effect younger taxpayers--would be forced to bail them out if they became insolvent. This presents a huge global moral hazard for the World Bank that has introduced defined contribution pension plans throughout the developing world and mandates the purchase of a life annuity at retirement. If annuity providers in Chile, where the World Bank program started in 1980, can game against the Chilean Government in this way, imagine the potential for intergenerational conflict that this could lead to if annuity providers in the rest of the world took the same attitude and later became insolvent. We should not underestimate the potential for this happening, given that annuities are commoditized products that sell on the basis of price and that an annuity provider, to gain market share, has an incentive to underestimate longevity improvements and hence underprice the annuities they sell. * Cord-Roland Rinke (Hannover Re) spoke on "The Role of Reinsurers in Longevity Risk Transfer" and argued that the risks in pension plans needed to be separated into their various components (such as mortality risk, investment risk, and regulatory risk) since this would help to structure the longevity hedge more effectively. * Hendrik Rogge and Stefan Sachsenweger (Deutsche B6rse) described recent developments in Deutsche Borse's Xpect longevity indices in "Index-based Longevity Risk Transfer to Capital Markets." The new sociodemographic indices are based on the actual mortality experience of pension funds and this will help to reduce the basis risk in the Xpect-based longevity swaps that are provided by Tullett-Prebon. * Amy Kessler (Prudential (US)) and Tim Gordon (Aon Hewitt) jointly presented "Crossing the Pond: UK Risk Transfer Techniques Have Reached the US. …