Advertisement

Longevity: a new asset class

Invited Editorial
  • 1 Downloads

Abstract

A little over a decade ago, a new asset class emerged, one linked to longevity risk, i.e., unanticipated changes in life expectancy. The Life Market has two segments: a macro-segment with assets linked to groups of lives, such as members of a pension plan or a book of annuitants; and a micro-segment with assets linked to individual lives, such as life settlements. For the market to become global, certain market requirements need to be satisfied, such as understanding the causal factors underlying longevity and the development of market indices and mortality forecasting models. The government has a role in contributing to the development of the market, as do pricing models. By addressing these issues, as well as understanding the needs of investors better, the asset class can become global, by attracting new groups of investors seeking returns that are uncorrelated with existing financial instruments.

Keywords

Longevity risk Longevity-linked assets Uncorrelated returns 

JEL Classification

G15 J11 

References

  1. Akerlof, G.A. 1970. The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism. Quarterly Journal of Economics 84 (3): 488–500.CrossRefGoogle Scholar
  2. Blake, D., and W. Burrows. 2001. Survivor Bonds: Helping to Hedge Mortality Risk. Journal of Risk and Insurance 68 (2): 339–348.CrossRefGoogle Scholar
  3. Blake, D., and D. Harrison. 2008. And Death Shall Have No Dominion: Life Settlements and the Ethics of Profiting from Mortality. Pensions Institute Report, London.Google Scholar
  4. Blake, D., A.J.G. Cairns, and K. Dowd. 2006. Living with Mortality: Longevity Bonds and Other Mortality-Linked Securities. British Actuarial Journal 12: 153–197.CrossRefGoogle Scholar
  5. Blake, D., A.J.G. Cairns, and K. Dowd. 2008. Longevity Risk and the Grim Reaper’s Toxic Tail: The Survivor Fan Charts. Insurance: Mathematics and Economics 42: 1062–1066.Google Scholar
  6. Blake, D., A.J.G. Cairns, G.D. Coughlan, K. Dowd, and R. MacMinn. 2013. The New Life Market. Journal of Risk and Insurance 80: 501–558.CrossRefGoogle Scholar
  7. Blake, D., T. Boardman, and A.J.G. Cairns. 2014. Sharing Longevity Risk: Why Governments Should Issue Longevity Bonds. North American Actuarial Journal 18 (1): 258–277.CrossRefGoogle Scholar
  8. Blake, D., A. J. G. Cairns, K. Dowd, and A. R. Kessler. 2018. Still Living with Mortality: The Longevity Risk Transfer Market After One Decade. Presented to the Institute and Faculty of Actuaries, Edinburgh, 29 January.Google Scholar
  9. Bugler, N., K. Maclean, N. Nicenko, and P. Tedesco. 2018. Reinsurance Sidecars: The Next Stage in the Development of the Longevity Risk Transfer Market. North American Actuarial Journal (forthcoming).Google Scholar
  10. Cairns, A. J. G., and Ghali El Boukfaoui. 2018. Basis Risk in Index Based Longevity Hedges: A Guide For Longevity Hedgers. North American Actuarial Journal (forthcoming).Google Scholar
  11. Cairns, A.J.G., D. Blake, and K. Dowd. 2006. A Two-Factor Model for Stochastic Mortality with Parameter Uncertainty: Theory and Calibration. Journal of Risk and Insurance 73: 687–718.CrossRefGoogle Scholar
  12. Cairns, A.J.G., D. Blake, K. Dowd, G.D. Coughlan, D. Epstein, A. Ong, and I. Balevich. 2009. A Quantitative Comparison of Stochastic Mortality Models using Data from England & Wales and the United States. North American Actuarial Journal 13: 1–35.CrossRefGoogle Scholar
  13. Cairns, A. J. G., M. Kallestrup-Lamb, C. P. T. Rosenskjold, D. Blake, and K. Dowd. 2017. Modelling Socio-Economic Differences in the Mortality of Danish Males Using a New Affluence Index. Pensions Institute Discussion Paper PI-1604, February.Google Scholar
  14. Carnes, B.A., S.J. Olshansky, and D. Grahn. 2003. Biological Evidence for Limits to the Duration of Life. Biogerontology 4 (1): 31–45.CrossRefGoogle Scholar
  15. Coughlan, G. D. 2011. Longevity as the New Asset Class. Presentation to Longevity 7: Seventh International Longevity Risk and Capital Markets Solutions Conference¸ Goethe University Frankfurt, 9 September.Google Scholar
  16. Coughlan, G.D., D. Epstein, A. Sinha, and P. Honig. 2007. q-Forwards: Derivatives for Transferring Longevity and Mortality Risks. London: J. P. Morgan Pension Advisory Group.Google Scholar
  17. Dowd, K., D. Blake, A.J.G. Cairns, and P. Dawson. 2006. Survivor Swaps. Journal of Risk and Insurance 73: 1–17.CrossRefGoogle Scholar
  18. Dowd, K., D. Blake, and A.J.G. Cairns. 2010. Facing Up to the Uncertainty of Life: The Longevity Fan Charts. Demography 47: 67–78.CrossRefGoogle Scholar
  19. Hunt, A., and D. Blake. 2015. Modelling Longevity Bonds: Analysing the Swiss Re Kortis Bond. Insurance: Mathematics and Economics 63: 12–29.Google Scholar
  20. Loeys, J., N. Panigirtzoglou, and R.M. Ribeiro. 2007. Longevity: A Market in the Making. London: J.P. Morgan Securities Ltd.Google Scholar
  21. Michaelson, A., and J. Mulholland. 2015. Strategy for Increasing the Global Capacity for Longevity Risk Transfer: Developing Transactions That Attract Capital Markets Investors. In Pension & Longevity Risk Transfer for Institutional Investors, ed. Brian R. Bruce. Fall, pp. 28–37.Google Scholar
  22. Oeppen, J., and J.W. Vaupel. 2002. Broken Limits to Life Expectancy. Science 296 (5570): 1029–1031.CrossRefGoogle Scholar
  23. Olshansky, S.J., B.A. Carnes, and R. Butler. 2001. If Humans Were Built to Last. Scientific American 284 (3): 50–55.CrossRefGoogle Scholar
  24. Olshansky, S.J., D. Passaro, R. Hershow, J. Layden, B.A. Carnes, J. Brody, L. Hayflick, R.N. Butler, D.B. Allison, and D.S. Ludwig. 2005. A Potential Decline in Life Expectancy in the United States in the 21st Century. New England Journal of Medicine 352: 1103–1110.CrossRefGoogle Scholar
  25. Pension Commission. 2005. A New Pension Settlement for the Twenty-first Century. Norwich: HMSO.Google Scholar
  26. Sandor, R. L. 1994. In Search of Market Trees: Market Architecture and Tradable Entitlements for CO2 Abatement. In Combating Global Warming: Possible Rules, Regulations, and Administrative Arrangements for a Global Market in CO 2 Emission Entitlements. New York: United Nations Conference on Trade and Development.Google Scholar
  27. Sandor, R. L. 2003. The First Chicago Climate Exchange Auction: The Birth of the North American Carbon Market. In Greenhouse Gas Market 2003: Emerging but Fragmented. Geneva: International Emissions Trading Association.Google Scholar
  28. Sandor, R. L. 2016. Financial Innovation. Presentation to Longevity 12: The Twelfth International Longevity Risk and Capital Markets Solution Conference, Chicago, 29 September.Google Scholar
  29. Shaw, C. 2007. Fifty Years of United Kingdom National Population Projections: How Accurate Have They Been? Population Trends 128: 8–23.Google Scholar
  30. Willets, R.C. 2004. The Cohort Effect: Insights and Explanations. British Actuarial Journal 10: 833–877.CrossRefGoogle Scholar

Copyright information

© Springer Nature Limited 2018

Authors and Affiliations

  1. 1.Pensions InstituteCass Business SchoolLondonUK

Personalised recommendations