Hostname: page-component-78c5997874-xbtfd Total loading time: 0 Render date: 2024-11-10T08:22:44.315Z Has data issue: false hasContentIssue false
  • English
  • Français

Living with Mortality: Longevity Bonds and Other Mortality-Linked Securities

Published online by Cambridge University Press:  10 June 2011

D. Blake ,
A. J. G. Cairns  and
K. Dowd
D. Blake
Affiliation:
Pensions Institute, Cass Business School, 106 Bunhill Row, London EC1Y 8TZ, U.K. Tel: +44 (0) 20 7040 5143; Email: D.Blake@city.ac.uk
A. J. G. Cairns
Affiliation:
Actuarial Mathematics and Statistics, School of Mathematical and Computer Sciences, Heriot-Watt University, Edinburgh EH14 4AS, U.K. Tel:+44 (0) 131 451 3245; Email: A.Cairns@ma.hw.ac.uk
K. Dowd
Affiliation:
Centre for Risk and Insurance Studies, Nottingham University Business School, Jubilee Campus, Nottingham NG8 1BB, U.K. Tel:+44 (0) 115 846 6682; Email: Kevin.Dowd@nottingham.ac.uk
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper addresses the problem of longevity risk — the risk of uncertain aggregate mortality — and discusses the ways in which life assurers, annuity providers and pension plans can manage their exposure to this risk. In particular, it focuses on how they can use mortality-linked securities and over-the-counter contracts — some existing and others still hypothetical — to manage their longevity risk exposures. It provides a detailed analysis of two such securities — the Swiss Re mortality bond issued in December 2003 and the EIB/BNP longevity bond announced in November 2004. It then looks at the universe of hypothetical mortality-linked securities — other forms of longevity bonds, swaps, futures and options — and investigates their potential uses. It also addresses implementation issues, and draws lessons from the experiences of other derivative contracts. Particular attention is paid to the issues involved with the construction and use of mortality indices, the management of the associated credit risks, and possible barriers to the development of markets for these securities. It suggests that these implementation difficulties are essentially teething problems that will be resolved over time, and so leave the way open to the development of flourishing markets in a brand new class of securities.

Keywords

Longevity RiskLongevity BondsMortality SwapsAnnuity FuturesMortality OptionsMortality SwaptionsSurvivor CapsMortality IndicesLiquidityBasis RiskCredit Risk
Type
Sessional meetings: papers and abstracts of discussions
Information
British Actuarial Journal , Volume 12 , Issue 1 , 01 March 2006 , pp. 153 - 197
Copyright
Copyright © Institute and Faculty of Actuaries 2006

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Barnett-Waddingham, (2004). Longevity bond to be issued by the EIB. http://www.barnett-waddingham.co.uk/cms/services/inscomps/news05022/viewDocumentGoogle Scholar
Beelders, O. & Colarossi, D. (2004). Modelling mortality risk with extreme value theory: The case of Swiss Re's mortality-indexed bond. Global Association of Risk Professionals, 4 (July/August), 26–30.Google Scholar
Bessembinder, H. & Seguin, P. (1993). Price volatility, trading volume, and market depth: Evidence from futures markets. Journal of Financial and Quantitative Analysis, 28, 21–39.CrossRefGoogle Scholar
Black, D.G. (1986). Success and failure of futures contracts: theory and empirical evidence. Monograph No. 1986–1, Monograph Series in Finance and Economics, Salomon Brothers Center for the Study of Financial Institutions, Graduate School of Business Administration, New York University.Google Scholar
Blake, D. & Burrows, W. (2001). Survivor bonds: helping to hedge mortality risk. Journal of Risk and Insurance, 68, 339–348.CrossRefGoogle Scholar
Blake, D., Cairns, A.J.G. & Dowd, K. (2003). Pensionmetrics II: stochastic pension plan design during the distribution phase. Insurance: Mathematics and Economics, 33, 29–47.Google Scholar
Brorsen, B. & Fofana, N. (2001). Success and failure of agricultural futures contracts. Journal of Agribusiness, 19, 129–145.Google Scholar
Cairns, A.J.G., Blake, D., Dawson, P. & Dowd, K. (2005). Pricing the risk on longevity bonds. Life and Pensions, October, 41-44.Google Scholar
Cairns, A.J.G., Blake, D. & Dowd, K. (2004). Pricing frameworks for securitization of mortality risk. Proceedings of the 14th International AFIR Colloquium, Boston, November 2004, 509–540.Google Scholar
Cairns, A.J.G., Blake, D. & Dowd, K. (2006a). A two-factor model for stochastic mortality with parameter uncertainty. Journal of Risk and Insurance, 73, 687–718.CrossRefGoogle Scholar
Cairns, A.J.G., Blake, D. & Dowd, K. (2005b). Pricing death: frameworks for the valuation and securitisation of mortality risk. Astin Bulletin, 36, 79–120.CrossRefGoogle Scholar
Carlton, D.W. (1984). Futures markets: their purpose, their history, their growth, their successes and failures. Journal of Futures Markets, 4, 237–271.CrossRefGoogle Scholar
CMI (2005). Projecting future mortality: towards a proposal for a stochastic methodology. Working Paper 15 of the Continuous Mortality Investigation. Faculty of Actuaries and Institute of Actuaries.Google Scholar
Corkish, J., Holland, A. & Vila, A.F. (1997). The determinants of successful financial innovation: an empirical analysis of futures innovation on LIFFE. London: Bank of England.Google Scholar
Cowley, A. & Cummins, J.D. (2005). Securitization of life insurance assets and liabilities. Journal of Risk and Insurance, 72, 193–226.CrossRefGoogle Scholar
Cox, S.H. & Lin, Y. (2004). Natural hedging of life and annuity mortality risks. Proceedings of the 14th International AFIR Colloquium, Boston, 483–507.Google Scholar
Currie, I.D., Durban, M. & Eilers, P.H.C. (2004). Smoothing and forecasting mortality rates. Statistical Modelling, 4, 279–298.CrossRefGoogle Scholar
Dowd, K., Blake, D., Cairns, A.J.G. & Dawson, P.E. (2006a). Survivor swaps. Journal of Risk and Insurance, 73, 1–17.CrossRefGoogle Scholar
Dowd, K., Cairns, A.J.G. & Blake, D. (2006b). Mortality-dependent financial risk measures. Insurance: Mathematics and Economics, 38, 427–440.Google Scholar
Ederington, L.H. (1979). The hedging performance of the new futures markets. Journal of Finance, 39, 157–170.CrossRefGoogle Scholar
Forfar, D.O., McCutcheon, J.J. & Wilkie, A.D. (1988). On graduation by mathematical formula. Journal of the Institute of Actuaries, 115, 1–149.CrossRefGoogle Scholar
Gray, R.W. (1978). Why does futures trading succeed or fail? an analysis of selected commodities. In Peck, A.E. (ed.) Readings in futures markets: views from the trade. Chicago: Chicago Board of Trade.Google Scholar
Lin, Y. & Cox, S.H. (2005). Securitization of mortality risks in life annuities. Journal of Risk and Insurance, 72, 227–252.CrossRefGoogle Scholar
Olivier, P. & Jeffery, T. (2004). Stochastic mortality models. Presentation to the Society of Actuaries of Ireland: see http://www.actuaries.ie/Resources/events_papers/PastCalendarListing.htmGoogle Scholar
Patel, K. (1994). Lessons from the FOX residential property futures and mortgage interest rate futures market. Housing Policy Debate, 5, 343–360.CrossRefGoogle Scholar
Pierog, K. & Stein, J. (1989). New contracts: what makes them fly or fail? Futures, September, 51-54.Google Scholar
Rohrer, M.B. (2004). The relevance of basis risk in the weather derivatives market. In Constantino, M. and Brebbia, C.A. (eds.). Computational finance and its applications. Southampton: WIT Press.Google Scholar
Srinivasan, S. (2004). CPI futures at CME. Chicago: Chicago Mercantile Exchange.Google Scholar
Wadsworth, M., Findlater, A. & Boardman, T. (2001). Reinventing annuities. Paper presented to the Staple Inn Actuarial Society. http://www.sias.org.uk/Google Scholar
Wisner, R. (1997). Understanding risk in basis contracts. Working paper, Department of Economics, Iowa State University.Google Scholar