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Longevity association to kick-start hedging activity

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  • Longevity association to kick-start hedging activity

UK - A group of eight banks, insurers and reinsurers has launched the Life and Longevity Markets Association (LLMA) to help promote the hedging and trading of longevity risk.

The association's first tasks will be to develop consistent standards and documentation, to create indices and create standardised valuation models to effectively price derivatives when longevity assumptions change.

Pension funds, holders of longevity risk, and reinsurers holding mortality risk, are natural counterparties. But while institutions such as Lucida and RSA, and the Babcock and Berkshire pension funds, have hedged longevity risk, the founders of the LLMA are concerned that the complexity of such deals is impeding the market.

Standardised agreements and products would assist both pension funds and insurers in hedging their longevity risk, the LLMA's members believe.

John Fitzpatrick, director of the LLMA, a partner at Pension Corporation and former chief financial officer of Swiss Re, said the market for longevity risk hedging would develop much more quickly than that for interest and inflation risk.

"Certainly it will go faster than the development of interest rate swaps and inflation swaps," said Fitzpatrick. "We have that as a precedent, we have a lot of experience at the table and people are motivated to do this as soon as practicable."

The first interest rate and currency  swap was between IBM and the World Bank in 1981 but it took a further 20 years for the practice to become widespread among pension funds or for investment managers to create products.

Once standardised agreements are hammered out, the LLMA's work could also assist in creating a longevity market in other countries.

"Longevity is a worldwide problem and the product we are creating could certainly be applicable globally. You could insert a Netherlands index for longevity and denominate it in euros," said Fitzpatrick.

"That kind of effort would be helped by having one combined agreement about the standard product and you just slot in the base of longevity you are examining, the index and the currency," he added.

The LLMA has been established by AXA, Deutsche Bank, Legal & General, JP Morgan, Pension Corporation, Prudential, RBS and Swiss Re.

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com

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