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This document provides a comprehensive examination This document provides a comprehensive examination of longevity risk transfer (LRT) markets, focusing on how pension funds, insurers, reinsurers, banks, and capital markets handle the risk that retirees live longer than expected. Longevity risk affects the financial sustainability of defined benefit (DB) pension plans and annuity providers, with even a one-year underestimation of life expectancy costing hundreds of billions globally.
The report explains the main risk-transfer instruments—buy-outs, buy-ins, longevity swaps, and longevity bonds—detailing how each shifts longevity and investment risk between pension plans and financial institutions. It highlights why the UK historically dominated LRT markets and analyzes emerging large transactions in the US and Europe.
It explores drivers of LRT growth (such as corporate de-risking, regulatory capital relief, and hedging opportunities for insurers) and impediments including regulatory inconsistencies, selection bias (“lemons” risk), basis risk in index-based hedges, limited investor appetite, and insufficient granular mortality data.
The document also assesses risk management challenges, such as counterparty risk, collateral demands in swap transactions, rollover risk, and opacity from multi-layered risk-transfer chains. It draws potential parallels to pre-2008 credit-risk transfer markets and warns of future systemic risks, especially if longevity shocks (e.g., breakthrough medical advances) overwhelm counterparties like insurers or banks.
Finally, the report presents policy recommendations for supervisors and policymakers: improving cross-sector coordination, strengthening risk measurement standards, increasing transparency, enhancing mortality data, ensuring institutions can withstand longevity shocks, and monitoring the growing interconnectedness created by LRT markets.... |