Longevity as an Asset Class:
Longevity risk is an asset class with an uncorrelated return profile and growing capacity requirements. For institutional investors with strong quantitative capabilities, longevity risk presents an enormous untapped source of risk premium, as there are over $50 trillion of un-hedged longevity-linked liabilities and the trend for de-risking is accelerating.
Investing in Longevity Risk:
Longevity risk is transacted a variety of formats, risk levels and maturities accommodating various investor’s business model.
Well-rated investors can enter derivative contracts (swaps) directly with hedgers using two-way collateral exchanges under a collateral support agreement (CSA), often based on some mark-to-model calculations.
Other investors can purchase fully-collateralized Longevity Notes (often zero-coupon), which enable capital markets investors to access this uncorrelated risk, and eventually may increase options for liquidity.
Who Should Consider Longevity Risk:
The unique return profile of the longevity risk asset class make it appealing for a broad spectrum of institutional investors:
- Life Reinsurers who view longevity risk as a core business, or supportive of mortality operations
- Fund managers seeking a diversifying return profile in a growing fixed income-like asset class
- Life Insurers who have large mortality risk portfolios and benefit from an offsetting exposure
- Non-Life Reinsurers seeking a new peril, but preferring to access a standardized exposure
- Long term investors – AM, SWF, F&E – attracted to a long-duration, uncorrelated investment