The Life & Longevity Markets Association (LLMA) has asked Australia’s Macquarie University to research the basis risk for longevity risk transactions.
Supported by the University of Waterloo in the Canadian province of Ontario, the Australian National University in Canberra and Mercer Australia, the Sydney-based university, will seek to design a “readily applicable methodology” for use in longevity risk indices.
“Such mortality indices are often used in pension benefits and annuitant liabilities, as well as in providing actuaries with key data,” the LLMA said in a joint statement with the UK’s Institute and Faculty of Actuaries (IFoA), which is also supporting the research.
The LLMA and UK actuarial body said the project was the second step in its research, building on phase one, which concluded in 2014 and developed the methodology to be used by the Australian and Canadian institutions.
Colin Wilson, president-elect of the IFoA, said the institute was “delighted” to be announcing its partners for the next step of its research.
“Managing longevity risk is a major concern for pension funds and life insurance companies,” he said.
“The practical application of assessing basis risk will be useful to many in the industry.”
Jackie Li, associate professor at Macquarie University, noted that longevity increases posed significant challenges to pension-fund sponsors and governments.
“It is of utmost importance to find theoretically sound and also practically feasible approaches to manage longevity risk,” she said.
“In particular, the use of population-based mortality indices has great potential to deal with this risk, but the problem of the existence of basis risk remains unsolved.”
The development of a functioning longevity risk market has long been desired by a number of academic bodies.