longevity risks were never securitized
and there were no longevity derivatives thatthese institutions could use to hedge their longevity risk exposures. However, thisstate of affairs is changing, and markets for longevity derivatives are starting todevelop. Most prominent amongst these are longevity bonds (LBs), which arefinancial instruments in which payments depend on the realization of a survivor indexfor some period
. As its name suggests, the survivor index is the proportion of some initial reference population aged
at time who are still alive at somefuture time
is the mortality rate between and for members of thereference population aged
at time and still alive at time , then therelationship between the sequence
and is given by:
( )( ) (
= − − −
Since we are dealing in this paper with reference populations from a single agecohort, we will simply denote below the survivor index as .
LBs were first proposed by Blake and Burrows, 2001, and the first operationalmortality-linked bond (the Swiss Re mortality catastrophe bond) appeared in 2003. Asecond mortality-linked bond (the EIB/BNP Paribas longevity bond) was announcedin 2004 (although it failed to come to market), and various other mortality-linkedproducts have also been issued or are in preparation.
However, many actuaries are still unconvinced that longevity bonds (and relatedderivatives) will have a significant part to play in the management of longevity risk.
Indeed, even supporters of LBs are divided on some of the key issues. For example,Blake, 2003, and Dowd, 2003, disagree on whether LBs should be issued by thestate,
and on the significance of a potential natural excess demand for products that
The issues involved in the securitization of longevity risks are discussed further by Cowley andCummins, 2005 and Krutov, 2006.
See, e.g., Lane, 2006.
Evidence of this scepticism was seen in the reaction of many in the audience when a recent paper(Blake
, 2006) was presented to meetings of the Faculty of Actuaries in Edinburgh and theInstitute of Actuaries in London in January and February 2006, respectively.
Furthermore, governments themselves are reluctant to issue longevity bonds. For example, the UKDebt Management Office, part of the UK Treasury, has recently stated ‘the issuance of ‘longevity’