Securitization of Longevity and Mortality Risk

This paper deals with Alternative Risk Transfer (ART) through the securitization of longevity and mortality risks in pension plans and commercial life insurance. Various types of such mortality-linked securities are described (e.g., CATM bonds, longevity bonds, mortality forwards and futures, and mortality swaps). Pricing methods and real examples are given. Hypothetical calculations concerning the pricing of potential mortality forwards that correspond to the evolution of longevity in the Czech Republic are presented.ART, life insurance, life market, longevity risk, mortality risk, pension plans, securitization, tontines

Still living with mortality: The longevity risk transfer market after one decade

This paper updates Living with Mortality published in 2006. It describes how the longevity risk transfer market has developed over the intervening period, and, in particular, how insurance-based solutions – buy-outs, buy-ins and longevity insurance – have triumphed over capital markets solutions that were expected to dominate at the time. Some capital markets solutions – longevity-spread bonds, longevity swaps, q-forwards, and tail-risk protection – have come to market, but the volume of business has been disappointingly low. The reason for this is that when market participants compare the index-based solutions of the capital markets with the customized solutions of insurance companies in terms of basis risk, credit risk, regulatory capital, collateral, and liquidity, the former perform on balance less favourably despite a lower potential cost.We discuss the importance of stochastic mortality models for forecasting future longevity and examine some applications of these models, e.g., determining the longevity risk premiumand estimating regulatory capital relief. The longevity risk transfer market is now beginning to recognize that there is insufficient capacity in the insurance and reinsurance industries to deal fully with demand and new solutions for attracting capital markets investors are now being examined – such as longevity-linked securities and reinsurance sidecars

Longevity Risk Management, Corporate Finance, and Sustainable Pensions

Historically, unexpected improvements in mortality rates have led to large, unanticipated increases in life expectancy, with accompanying increases in the value of defined benefit pension liabilities. As a result, longevity risk needs to be measured and managed alongside the financial risks facing these plans. The emergence of new instruments for hedging longevity risk means that a complete toolkit is now available for managing these plans in a way that is sustainable over the long term. Decisions to hedge or eliminate longevity risk need to be made in a holistic framework. For corporate pension plans this means taking account of the corporate finance perspective, as well as the interdependencies between the sponsor and the plan. This paper addresses the importance of measuring and managing longevity risk and presents a holistic framework for sustainable pension plan management that facilitates longevity risk management decision-making

Hedging the unhedgeable

Bravo, J. M., & Díaz-Giménez, J. (2014). Is longevity an insurable risk? Hedging the unhedgeable. (pp. 1). (Papers Mi Jubilación; No. 9). Instituto BBVA de Pensiones.In the 18th century, Benjamin Franklin said that "Nothing is certain but death and taxes". The 21st-century adaptation of this famous expression could be "nothing is certain but longevity and taxes." Longevity risk is a critical risk for institutions that provide life-long payments such as pension funds, annuity providers and public pension schemes. The amount of unfunded liabilities institutions face will be massive if their beneficiaries live considerably longer than expected. This paper addresses the problem of longevity risk and discusses the ways in which individuals, life assurers, annuity providers and pension plans can manage their exposure to this risk. We discuss whether the traditional insurance mechanism, involving risk transfer and pooling, can deal appropriately with longevity risk. We then review longevity risk management solutions, comprising both traditional insurance and reinsurance techniques and recently developed capital market instruments.publishersversionpublishe

The pension system in Finland: Institutional structure and governance

Professors Nicholas Barr and Keith Ambachtsheer have charted the Finnish earnings-related pension scheme at the request of the Finnish Centre for Pensions. Barr and Ambachtsheer are internationally renowned and esteemed experts in the pension field. Professor, Director Keith Ambachtsheer (Rotman International Centre for Pension Management, Rotman School of Management, University of Toronto) investigated system governance in his evaluation

Estimation of Longevity Risk and Mortality Modelling

Dissertation presented as the partial requirement for obtaining a Master's degree in Statistics and Information Management, specialization in Risk Analysis and ManagementPrevious mortality models failed to account for improvements in human mortality rates thus in general, human life expectancy was underestimate. Declining mortality and increasing life expectancy (longevity) profoundly alter the population age distribution. This demographic transition has received considerable attention on pension and annuity providers. Concerns have been expressed about the implications of increased life expectancy for government spending on old-age support. The goal of this paper is to lay out a framework for measuring, understanding, and analyzing longevity risk, with a focus on defined pension plans. Lee-Carter proposed a widely used mortality forecasting model in 1992. The study looks at how well the Lee-Carter model performed for female and male populations in the selected country (France) from 1816 to 2018. The Singular Value Decomposition (SVD) method is used to estimate the parameters of the LC model. The mortality table then assesses future improvements in mortality and life expectancy, taking into account mortality assumptions, to see if pension funds and annuity providers are exposed to longevity risk. Mortality assumptions are predicted death rates based on a mortality table. The two types of mortality are mortality at birth and mortality in old age. Longevity risk must be effectively managed by pension and annuity providers. To mitigate this risk, pension providers must factor in future improvements in mortality and life expectancy, as mortality rates tend to decrease over time. The findings show that failing to account for future improvements in mortality results in an expected provision shortfall. Protection mechanisms and policy recommendations to manage longevity risk can help to mitigate the financial impact of an unexpected increase in longevity

Longevity Risk and Capital Markets: The 2018-19 Update

This Special Issue of the Annals of Actuarial Science contains 12 contributions to the academic literature all dealing with longevity risk and capital markets. Draft versions of the papers were presented at Longevity 14: The Fourteenth International Longevity Risk and Capital Markets Solutions Conference that was held in Amsterdam on 20-21 September 2018. It was hosted by the Pensions Institute at Cass Business School and the Netspar Network for Studies on Pensions, Ageing and Retirement

Competition and performance in the Hungarian second pillar

The performance of the Hungarian second pillar since inception has been mixed. This is partly due to a less than satisfactory support for the 1997 pension reform, conservative fund portfolio distributions, the hybrid nature of the mandatory pension fund system, the segmented nature of the market in terms of costs, and a less than aggressive commitment on the part of the Hungarian Financial Supervisory Authority to a low-cost, transparent, and competitive equilibrium. In the accumulation phase, the authorities would need to further promote transparency and comparability of information on costs and investment performance, facilitate migration to lower cost funds, and more generally promote competition. The regulatory framework of the payout phase needs to be overhauled before the first cohort of workers retires.Investment and Investment Climate,Economic Theory&Research,Economic Stabilization,Financial Intermediation,Settlement of Investment Disputes

Strengthening Employment-Based Pensions in Japan

We investigate how the Japanese pension market for funded employment-based pensions is changing and how it might be strengthened in order to better serve one of the most rapidly aging populations in the world. Public and private pensions in Japan are estimated to hold around US$3 trillion, making that system the second largest globally after the United States. However, unfavorable economic developments have cut sharply cut into asset values, and the weak economy is undermining traditional lifetime employment contracts. Recent legislation permitting the establishment of defined contribution plans in Japan may provide new employer-sponsored retirement plan opportunities. We first describe the Japanese pension system at the end of the 20th century and provide an overview and evaluation of the changes in the pension arena emerging from the 2001 legislation. Next we show that important design questions remain to be answered, if Japanese employment-based pensions are to be reformed and modernized. Finally we indicate lessons gleaned from recent changes in US pension plans.