The seventh annual Longevity Risk and Capital Markets Solutions Conference held at Goethe UniversÃty in Frankfurt last week generated a buzz around converting the longevity risk into asset.
It is done by creating slices or tranches by the levels of risk posed and have someone buy them. The buyer gets a stream of income (premium share) in exchange for a consideration, one time fixed or another stream of fixed income. Reinsurance is a bit close to this. It is similar to CDS, the reference entity here being the annuitants as a class, and the "default" here is the longevity beyond product design assumptions (or even contract specifcations).
Tom Armistead in his seekingalpha.com column mentions, "Insurance companies or pension funds that have an excess of longevity risk can create insurance policies to protect and hedge themselves. The policies, which will entail a flow of premiums, can then be sold as assets, with the premiums masquerading as dividends, thereby unloading longevity risk.
Longevity may take a long time to manifest itself. As such, the opportunity of packaging and selling the risk will be ongoing. The so-called assets may exhibit rock solid performance for years.".
But who will be ready to take the long position of the synthetic asset? Reinsurers? And what all the considerations for that - Medical Underwriting at annuitization? And how would the buyers hedge their risk of being out the money?
Interesting aspects to consider.
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