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As life spans increase, banks consider death derivatives

LONDON — Goldman Sachs, Deutsche Bank and JPMorgan Chase, which bundled and sold billions of dollars of mortgage loans, now want to help investors bet on people's deaths.

Pension funds sitting on more than $23 trillion of assets are buying insurance against the risk their members live longer than expected. Banks are looking to earn fees from packaging that risk into bonds and other securities to sell to investors. The hard part: Finding buyers willing to take the other side of bets that may take 20 years or more to play out.

"Banks are increasingly looking to offer derivative solutions," said Nardeep Sangha, 43, chief executive officer of Abbey Life Assurance Co., a London-based Deutsche Bank unit that helps pension funds manage the risk of retirees living longer than expected. "Making the long maturity of the risks palatable for investors, including sovereign wealth funds, private-equity firms and specialist funds, is the challenge."

As insurers reach the limit of how much pension-fund liability they're willing to shoulder, companies such as JPMorgan and Prudential last year set up a trade group aimed at establishing and standardizing a secondary market for so-called longevity risks. They're also developing indexes that measure mortality rates and securities to let pension funds pay fixed premiums to investors in return for coverage against major deviations from projections.

Swiss Reinsurance Co., the second-biggest reinsurer, sold the world's first longevity bond in December in what it called a "test case."

Goldman Sachs, based in New York, and Deutsche Bank in Frankfurt have set up insurance companies that promise to pay pensions if retirees live beyond a certain age. They typically receive a portion of the pension plan's assets in return. The banks, along with Morgan Stanley, Credit Suisse Group and UBS, are looking for ways to offer this risk to investors.

Medical advances and healthier lifestyles have made predicting life spans more difficult for pension funds. Life expectancy in Britain, for example, is increasing by one to three months every year, according to Dutch insurer Aegon. Every year of additional life expectancy typically adds as much as 4 percent to future pension requirements, Aegon said in a report in March.

As life spans increase, banks consider death derivatives 05/17/11 [Last modified: Wednesday, May 18, 2011 12:14am]

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