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DISCUSSION PAPER PI-0807

The Birth of the Life Market

David Blake, Andrew Cairns and Kevin Dowd

The huge economic significance of longevity risk for corporations, governments
and individuals is beginning to be recognized and quantified. The traditional insurance
route for managing this risk is capacity constrained, leaving the capital markets to
provide an effective solution. We consider what capital markets need to both start and
evolve. We then look at the first generation of bond-based capital market solutions that
have been tried so far and examine their success or failure. The lessons learned here
have informed the design of the second generation of derivatives-based capital market
solutions. Although there remain barriers to surmount, we arewitnessing the birth of the
life market, the market in longevity-related financial instruments.