Hosts
Conference summary
Longevity 7: Seventh International Longevity Risk and Capital Markets Solutions Conference
Thursday 8 and Friday 9 September 2011
Goethe University Frankfurt
Hosted by the House of Finance, Goethe University, and the Pensions
Institute
The International Longevity Risk and Capital Markets Solutions Conference
is the major annual international conference bringing together leading international
industry and academic minds as well as policy makers to meet and discuss not
only the assessment of longevity risk, but also the market and government developments
and responses needed by pension funds, insurance companies and others to manage
this risk.
The Seventh International Longevity Risk and Capital Markets Solutions Conference
(Longevity 7) was held on 8 and 9 September 2011 in Frankfurt. The conference
followed the highly successful events over the last six years in London, Chicago,
Taipei, Amsterdam, New York and Sydney. The key theme of Longevity 7 was how
to make longevity an accessible asset class for investors. The conference attracted
160 participants from 20 countries across all continents.
David Blake (Pensions Institute) opened the conference with a review of developments
over the last year which included: the issue of the Swiss Re Kortis Longevity
Bond in December 2010, the first buy-in deal outside UK also in December 2010
between the Dutch food manufacturer Hero and the Dutch insurer Aegon, the world’s
first longevity swap for non-pensioners in February 2011 between J. P. Morgan
and the Pall (UK) pension fund, the first buy-in deal in the US in May 2011
between Hickory Springs Manufacturing Company and Prudential Retirement, the
first international longevity reinsurance transaction in June 2011 between Rothesay
Life (UK) and Prudential Retirement (US), and the first life book reinsurance
swap since the Global Financial Crisis between Atlanticlux and institutional
investors in June 2011.
There were seven plenary sessions with nine international plenary speakers and
twelve workshop sessions with 40 academic papers presented at the conference.
At the opening plenary session, Prof. Jim Vaupel (Max Planck Institute for Demographic
Research, Rostock) in a presentation entitled ‘Longer and longer lives’
pointed out that in recent decades remaining life expectancy at age 65 has been
steadily rising—at about 4-5 hours per day in the countries doing best.
As life expectancy increases, the healthy span of life is increasing at about
the same pace. If improvements continue—and there is no sign of any looming
limit—then most children born since the turn of the century in countries
with high life expectancy will celebrate their 100th birthday. Clearly, this
will have significant implications for global pension systems.
At the second plenary session, Ivan Zelenko (World Bank) described the World
Bank’s attempt to issue a longevity bond in Chile in 2009 in a talk entitled
‘Longevity bonds and the financial stability of retirement systems’.
Despite the fact that the proposed longevity bond not only hedged systematic
longevity risk, but also provided a return over government bonds, Chilean annuity
providers refused to buy the bond and so the bond failed to get launched. Their
explanation for this was that they did not need to buy the bond because they
knew the government —in effect younger tax payers—would be forced
to bail them out if they became insolvent. This presents a huge global moral
hazard for the World Bank which has introduced defined contribution pension
plans throughout the developing world and mandates the purchase of a life annuity
at retirement. If annuity providers in Chile, where the World Bank programme
started in 1980, can game against the Chilean government in this way, imagine
the potential for intergenerational conflict that this could lead to if annuity
providers in the rest of the world took the same attitude and later became insolvent.
We should not underestimate the potential for this happening, given that annuities
are commoditized products that sell on the basis of price and that an annuity
provider, to gain market share, has an incentive to underestimate longevity
improvements and hence underprice the annuities they sell.
The third and fourth plenary sessions looked at role of reinsurers and the capital
markets, respectively, in longevity risk transfers. Cord-Roland Rinke (Hannover
Re) spoke on ‘The role of reinsurers in longevity risk transfer’
and argued that the risks in pension plans needed to be separated into their
separate components (such as mortality risk, investment risk and regulatory
risk) since this would help to structure the longevity hedge more effectively.
Hendrik Rogge and Stefan Sachsenweger (Deutsche Börse) described recent
developments in Deutsche Börse’s Xpect longevity indices in ‘Index-based
longevity risk transfer to capital markets’. The new sociodemographic
indices are based on the actual mortality experience of pension funds and this
will help to reduce the basis risk in the Xpect-based longevity swaps that are
provided by TullettPrebon.
In the final plenary session on day 1 of the conference, Amy Kessler (Prudential
Retirement) and Tim Gordon (Aon Hewitt) jointly presented "Crossing the
pond: UK risk transfer techniques have reached the US". They recognized
that the UK is the most vibrant market in the world for pension plan de-risking
and this has been driven by regulation, accounting transparency and increasing
risk awareness among pension plans that has led to dramatic changes in risk
management and governance. Many of the same catalysts for change are arriving
in the US today. As US pension plan sponsors face these changes, there is broad
recognition that their current risk position is unsustainable. While affordability
remains an issue, techniques used in the UK for reducing and transferring risk
have crossed the pond. Pension buy-in transactions have just arrived and longevity
insurance will follow, but demand will likely be modest until there is greater
awareness of pension longevity risk in the US. Fortunately, this increased awareness
is on its way as US longevity risk analysis tools and research are developed.
The afternoon of the first day of the conference was devoted to workshop sessions.
These had an emphasis on mortality modelling and risk management. Longevity
risk in households, pension plans, and annuities also featured. The second day
of the conference also began with workshops, again with an emphasis on modelling.
The pricing of longevity related securities was also covered. Previous conferences
concentrated on the macro-longevity risk in large pension plans and annuity
pools. In this conference, for the first time, a number of papers that were
presented dealt with micro-longevity risk in the form of life settlements.
The conference ended with two plenary sessions and a panel concentrating on
the main theme this year, namely how to turn longevity into an accessible asset
class for investors. Guy D. Coughlan (Pacific Global Advisors) in “Longevity
as the new asset class" argued that longevity is an asset class that delivers
to investors a risk premium and diversification benefits, providing a very attractive
risk-return profile. However its popularity among investors has not taken off
a quickly as anticipated owing to well-known challenges in terms of its long
duration characteristics, its (current) lack of liquidity and its complexity.
Coughlan believed that the key to unlocking this market comes down to taking
a fresh look at the entire longevity supply chain, from the defined benefit
pension plans and annuity portfolios through insurers and reinsurers and the
range of potential end investors. Jeff Mulholland (Société Générale)
in the final plenary session called "Micro vs. macro longevity indices"
argued that both the micro-longevity and macro-longevity markets provide investors
with the opportunity to earn attractive risk-adjusted returns on a buy and hold
basis. Currently, the micro-longevity market can be accessed via a market index
(in a manner that shields investors from the legal and reputational risks of
the cash life settlements market) that provides an unleveraged expected return
in US dollars that is higher than that achievable through the macro-longevity
market. Additionally, Mulholland believed that spreads may tighten in the micro-longevity
market due to market forces, providing the opportunity for potential mark-to-market
gains through time. Separately, the macro-longevity market currently provides
lower unleveraged returns, and the amount of pension risk that needs to be hedged
globally suggests that spreads may need to widen through time to clear the market.
The opportunity to relative value trade these markets may prove attractive as
liquidity develops over time.
The panel was chaired by Guy D. Coughlan (Pacific Global Advisors)
and consisted of Axel Gerling (Commerzbank), Ivan Zelenko (World Bank), Terry
Simmons (Ernst & Young), Jeff Mulholland (Société Générale),
Klaus Mössle (Fidelity), and Marcus Mecklenburg (BVI). The panel considered
whether longevity could be treated as a market like any other, with a supply
side and a demand side and manufacturers in between. In this framework, longevity
risk could be treated as a raw material that was sourced from pension plans
and annuity providers: they constituted the supply side of the market. In the
centre of the market sit (re)insurers and investment banks who can thought of
as manufacturers whose job is to turn the raw materials into a product that
investors on the demand side of the market wish to purchase. The panellists
considered what was needed to make this ‘product’ attractive to
investors. It was clear that longevity risk could be made attractive to investors
if it could be packaged into a standardized form with a short maturity. But
therein lies the fundamental problem with longevity risk as an asset class.
It is by nature long term and we are left with the question: ‘If investors
only want the short end, who is left holding the tail risk?’
The conference was made possible with the support of the excellent range of
international speakers as well as financial support from the sponsors: BVI Bundesverband
Investment und Asset Management, Commerzbank Corporates & Markets, Deutsche
Börse – Market Data & Analytics, Ernst & Young, Fidelity
International, and Hannover Re. Support from the Pensions Institute at Cass
Business School and the House of Finance, Goethe University in Frankfurt resulted
in a highly efficient administration of the event.
Future Longevity conferences are scheduled for Toronto in 2012 and Beijing in
2013.
The Journal of Risk and Insurance will publish a Special Issue of selected papers
presented at the conference. All papers will be subject to the journal review
process.
Conference proceedings including presentation and papers are available from
the web site
Raimond Maurer, Goethe University Frankfurt/Main, House of Finance
David Blake, Pensions Institute, Cass Business School, City University London
Richard MacMinn, Katie School, Illinois State University