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The mortality-linked securities
issued by Swiss Re in December 2003 and EIB/BNP Paribas announced in November 2004 to cover mortality surprises on the life and annuity contracts are two recent examples.
The EIB/BNP Paribas bond was the world’s first example of a Longevity (or Survivor) Bond. A Longevity Bond pays a coupon that is proportional to the number of survivors in a selected birth cohort ; letting the cohort be the number of individuals turning sixty-five in the year that the bond is issued, the coupon the following year would be proportional to the number in the cohort that survive to this year
. Since this payoff matches the liability of annuity providers, Longevity Bonds create an effective hedge against longevity risk.
Longevity risk in conjunction with interest rate risk has created problems for the annuity market.
The immediate annuity market in the US is approximately two billion dollars per year while the UK immediate annuity market is approximately 10 billion dollars per year. As more and more baby boomers retire, annuity markets will grow as will the risk and consequences of underestimating mortality improvements. The whole private sector pension system in developed economies like the United States and United Kingdom are potentially at risk without hedging instruments such as Longevity Bonds. At the same time, the newly developing economies of Latin America, South East Asia, Eastern Europe and the former Soviet Union states, which are attempting to establish
issued by Swiss Re in December 2003 and EIB/BNP Paribas announced in November 2004 to cover mortality surprises on the life and annuity contracts are two recent examples.
The EIB/BNP Paribas bond was the world’s first example of a Longevity (or Survivor) Bond. A Longevity Bond pays a coupon that is proportional to the number of survivors in a selected birth cohort ; letting the cohort be the number of individuals turning sixty-five in the year that the bond is issued, the coupon the following year would be proportional to the number in the cohort that survive to this year
. Since this payoff matches the liability of annuity providers, Longevity Bonds create an effective hedge against longevity risk.Longevity risk in conjunction with interest rate risk has created problems for the annuity market.
The immediate annuity market in the US is approximately two billion dollars per year while the UK immediate annuity market is approximately 10 billion dollars per year. As more and more baby boomers retire, annuity markets will grow as will the risk and consequences of underestimating mortality improvements. The whole private sector pension system in developed economies like the United States and United Kingdom are potentially at risk without hedging instruments such as Longevity Bonds. At the same time, the newly developing economies of Latin America, South East Asia, Eastern Europe and the former Soviet Union states, which are attempting to establish
