Capital Markets and Longevity Risk – New Day or False Dawn?
I continue to believe that the broadening application of derivative-based capital market solutions to insurance risk will be a major story of the next five to ten years. That said, progress to date has been slow in both the life and the property and casualty arenas. Recently JP Morgan-Chase launched a new effort called LifeMetrics to allow creation of derivative contracts based on longevity. Initial longevity indices are being published for the US and for England & Wales.
(See http://www.jpmorgan.com/pages/jpmorgan/investbk/solutions/lifemetrics)
Americans of a certain age will remember comedian Pat Paulsen’s mock campaign for the presidency. One of his skits involved a reporter asking, “Mr. Paulsen, what is your position on the population explosion?”
“Well,” he responded, “I’m glad you ask because I’m something an expert on the population explosion. You see, I was in India the day it happened!”
At a recent PRMIA seminar in London, an actuarial consultant stated that the advances in life expectancy in Britain in the past 15 years have been equal to those of the prior 150 years! This is not a pace of change likely to set a hardened trader’s nerves on edge (or to rob the humor from Paulsen’s quip) but it certainly is enough to get the attention of insurance companies that underwrite life annuities.
The real question is whether an index such as LifeMetrics has produced will generate enough two-sided interest to produce reasonable liquidity. I am interested in your reaction on whether this is the start of a major incursion of capital markets into this arcane form of risk or is it another false dawn?