Researchers have identified the re-packaging of longevity risks into products tradable on the secondary market as a “crucial step” to increasing interest longevity-linked securities, conference participants heard in Vienna.
At a retirement symposium organised by Bank Gutmann and the Vienna Economic University (WU), Claudio Tebaldi from the Italian L. Bocconi University presented research he published last year together with other researchers entitled “A Multivariate Model of Strategic Asset Allocation with Longevity Risk”.
They found a potentially large number of short-term investors would be willing to increase their exposure to longevity risk, but without increasing the duration in their portfolio.
According to Tebaldi the potential investors wanted to use the proceeds from these assets ”to fund bond and equity investments as this gives them a non-cyclically correlated source of financing”.
He added the research team was “surprised” by the 0.5 Sharpe ratio from longevity-linked investments, but stressed it was “risky in risk-return tradeoffs with a lot of leverage”.
For a longevity securitisation market to work, however, “a more transparent and efficient pricing of life annuities” was required to create “an integrated market for insurance and financial contracts with a publically traded longevity index”.
The prediction of returns of such products was “surprisingly accurate” as “aggregate longevity is mean reverting and can be used for the predictions”, Tebaldi noted.
This was confirmed by Marcel Fischer from the Copenhagen University who discussed the paper at the conference.
However, Fischer pointed out there was “no well-working secondary market for products underwritten by insurers” and therefore it was “difficult” for investors to assess such risks.
He also questioned whether investors could “make money on this or if the market is too narrow”.
Last year, the OECD had also called for more standardisation and transparency in the pricing of longevity risk to allow the market to grow.
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