Longevity Bonds - a Financial Market Instrument to Manage Longevity Risk

Submitted on 29th July 2015

Life expectancy has been increasing over the last centuries. Naturally, it is positive that people live longer, but this also means that they must reconsider their savings in order to maintain a satisfactory standard of living when they retire. If people outlive their reserves, they will at some point have to reduce their standard of living. Since the exact time of death is not known, there will always be some uncertainty regarding the savings required. Many pension schemes include life annuities, so that the pension companies make fixed monthly payments during the remaining part of the policyholder's life.

This transfers the longevity risk from the individual policyholder to the pension company. If life expectancy increases more than expected, pension companies will have to pay out more than projected, resulting in a loss to those companies With a view to managing the uncertainty related to future life expectancy, various players have sought to develop financial instruments that are indexed to the longevity of the population. These new instrument types, known as longevity bonds, transfer the risk in connection with higher life expectancy to investors in the financial markets.

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Governor Jens Thomsen and Jens Verner Andersen
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