Challenges remain to trading longevity indices
The publication of a set of longevity indexes by the Life & Longevity Markets Association (LLMA) will help to develop the longevity risk transfer market, but there is still a long way to go if a tradable market is to be created, say experts.
The four indexes cover England and Wales, Germany, the Netherlands and the US. The LLMA hopes that the tools will be used as a global reference for the transfer of longevity risk from hedgers to investors and other counterparties and could help broaden the appeal of such transactions.
Reinsurers have previously been the largest provider of capacity for longevity risk, but the creation of a transparent and uniform reference for the trades could encourage alternative investment from the capital markets to grow, the LLMA argues.
Blaise Bourgeois, LLMA representative and life chief risk officer at Axa Group, based in Paris, says the new indexes will improve transparency and consistency by reducing the potential for ‘selection bias’ in the data used for assessing longevity trades.
“The indexes present a standardised measure of the evolution of mortality rates and period life expectancy: LLMA members have agreed on a common quantitative methodology to compute the metrics relied upon for index-based hedges. We are not giving any prospective view, but providing a common ground on which to base transactions,” says Bourgeois.
The launch of the indexes follows a €12 billion longevity swap by Dutch insurer Aegon, which was thought to be the largest of its kind, and was claimed to be the first deal aimed specifically at the capital markets.
While the launch of the LLMA’s indexes has been welcomed, experts suggest that there is still significant work to be done if a tradable market in longevity risk is to be created.
“One of the big issues about longevity is how difficult it is to be traded in the market. The longevity indexes start to make it easier for it to be traded in the capital markets but I don’t think that is the job done,” says Brian Bussel, director of marketing, pensions and post-retirement at insurer Aviva, based in York.
Further education of capital market participants is needed, as well as a generic system for processing the transactions if a sizeable audience is to be created, suggests Bussel. “The current situation where every single longevity swap is detailed and demands understanding of the individual scheme’s issues doesn’t bode well for the assets being freely traded and the indexes start to address this issue. However, standard contracts and standard or simplified wordings would also be beneficial,” he says.
He adds: “There will probably need to be a fair amount of trustee education as well. A standard approach to collaterialisation would be good too. All these things are other steps along the way, but creating longevity indexes is a good start.”