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Living with Morality: Longevity Bonds and other Mortality-Linked Securities

D.Blake, A.J.G Cairns and K.Dowd


This paper addresses the problem of longevity risk ö the risk of uncertain
aggregate mortality ö and discusses the ways in which life assurers, annuity
providers and pension plans can manage their exposure to this risk. In particular,
it focuses on how they can use mortality- linked securities and over-the-counter
contracts ö some existing and others still hypothetical ö to manage their longevity
risk exposures. It provides a detailed analysis of two such securities ö the
Swiss Re mortality bond issued in December 2003 and the EIB/BNP longevity bond
announced in November 2004. It then looks at the universe of hypothetical
mortality-linked securities ö other forms of longevity bonds, swaps, futures and
options ö and investigates their potential uses. It also addresses implementation
issues, and draws lessons from the experiences of other derivative contracts.
Particular attention is paid to the issues involved with the construction and use of
mortality indices, the management of the associated credit risks, and possible
barriers to the development of markets for these securities. It suggests that
these implementation difficulties are essentially teething problems that will be
resolved over time, and so leave the way open to the development of flourishing
markets in a brand new class of securities.