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The Actuary The magazine of the Institute & Faculty of Actuaries

Trading longevity risk

Longevity risk in conjunction with interest rate risk has created problems for the annuity market. The immediate annuity market in the US is approximately $2bn per year while the UK immediate annuity market is approximately $10bn per year. As more and more baby boomers retire, annuity markets will grow as will the risk and consequences of underestimating mortality improvements. The whole private sector pension system in developed economies like the US and UK are potentially at risk without hedging instruments such as longevity bonds. At the same time, the newly developing economies of Latin America, south-east Asia, eastern Europe, and the former Soviet Union states, which are attempting to establish private-sector pension systems, often under World Bank guidance, are likely to find that these attempts are frustrated by the absence of annuities markets which cannot get off the ground without the existence of hedging instruments to help annuity providers hedge the longevity risk they face.

A longevity bond conference organised by the Pensions Institute at Cass Business School in February attracted a huge amount of interest from government, regulators, investment banks, insurance companies, pension funds, and academics – those with a vested interest in dealing with the risk associated with people living longer.

For more about this important conference, see www.pensions-institute.org/conferences/longevity/programme.html.