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DISCUSSION PAPER PI-1203

Informed Intermediation of Longevity Exposures

Enrico Biffis and David Blake

We examine pension buyout transactions and longevity risk securitization in a common
framework, emphasizing the role played by asymmetries in capital requirements and mortality
forecasting technology. The results are used to develop a coherent model of intermediation
of longevity exposures, between defined benefit pension schemes and capital market
investors, through insurers operating in the pension buyout market. We derive several predictions
consistent with the recent empirical evidence on pension buyouts, and offer insights
on the role of buyout firms and regulation in the emerging market for longevity-linked securities.
A multi-period version of the model is used to explore the effects of longevity risk
securitization on the capacity of the pension buyout market and on buyout prices.