Conference Summary

Sydney

Longevity 6: Sixth International Longevity Risk and Capital Markets Solutions Conference
9th and 10th of September 2010
Swiss-Grand Resort & Spa, Bondi Beach, Sydney, Australia

Hosted by Australian Institute of Population Ageing Research in the Australian School of Business, UNSW

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 and insurance companies to manage this risk.

The Sixth International Longevity Risk and Capital Markets Solutions Conference (Longevity 6) was held on 9 and 10 September 2010 in Sydney at the famous Bondi Beach. The conference followed the highly successful events over the last five years in London, Chicago, Taipei, Amsterdam, and New York. Longevity 6 was hosted by the Australian Institute for Population Ageing Research and the Australian School of Business at UNSW. The key themes of Longevity 6 were “Reinsurance and Financial Markets Solutions”; “Government Role, Public and Private Sector Solutions”. The conference attracted 120 participants from 15 countries in Asia, UK, Europe and North America proving to highly successful with strong industry and researcher participation.

David Blake (Pensions Institute, UK) opened the conference highlighting the significance of the longevity risk in pension plans and insurers and the need for reinsurance and financial market solutions as well as the involvement of key policymakers. Developments in the life market including recent longevity swaps and the formation of the Life and Longevity Markets Association (LLMA) and their role in providing solutions were outlined. The aims of the conference in bringing together leading international practitioners and researchers and providing policy and market solutions was emphasized.

There were three plenary sessions with eight international plenary speakers and eleven workshop sessions with 34 papers presented at the conference. At the opening plenary session, Guy Coughlan (JP Morgan London) covered the developments in the formation of the Life and Longevity Markets Association (LLMA). There are ten current members of the LLMA comprising AXA, Deutsche Bank, J.P. Morgan, Legal & General, Morgan Stanley, Pension Corporation, Prudential, RBS, Swiss Re, and UBS. The challenges of the market and the role of LLMA were outlined as well as the draft Longevity Index Framework published by the LLMA published on 18 August 2010. Morton Lane (LaneFinancial Chicago and University of Illinois) then presented his thoughts on the development of the longevity market from the perspective of the insurance-linked securities market. He noted how the ILS market had developed a bond structure, whereas the transactions in the longevity market have been swap or derivative based. He discussed the importance of a “trigger” in the form of an event in the ILS market that was not evident in the longevity market, as well as the pricing role of the ILS market and the need for transparency of pricing in the longevity market. Guy Coughlan then presented on the role of longevity indices and hedging of longevity risk providing a framework for evaluating basis risk and hedge effectiveness along with a case study. Index based transactions will, and currently do, play a major role in managing longevity risk and these require the development of reliable longevity indices.

The first group of workshop sessions had an emphasis on modeling and pricing longevity risk and instruments to manage the risk including options. Index construction and the role of collateral were also covered. Economic, financial and econometric approaches were featured in the papers presented in this session. The second group of workshop sessions covered hedging and hedging effectiveness for longevity risk and various products as well as optimal portfolio choice including life annuities. Other issues related to health and self insurance of longevity risk were also covered.

In the second plenary at the close of the first day, Ross Jones (Member and Deputy Chairman of the Australian Prudential Regulation Authority) then provided an international perspective as a regulator, including the policy response to the financial crisis in pensions, as well as setting the Australian longevity market in context. He highlighted how regulators have a role in implementing policy but do not develop policy. He addressed the issues of funding of DB plans, the adequacy of retirement savings and the lack of financial instruments to hedge longevity risk. He summarized key OECD recommendations explaining how government can help by providing updated mortality tables that incorporate longevity improvements, can play a role by developing a longevity index that can be used for pricing, and can issue inflation-indexed long dated bonds to facilitate asset-liability management. The importance of investing in research was also noted as a significant part of the solution for both government and the private sector. Martin Clarke (Executive Director of Financial Risk, Pension Protection Fund, UK) then covered how the Pension Protection Fund in the UK approaches longevity risk including its approach to modeling and hedging. The fund targets self sufficiency over a longer horizon and sees longevity de-risking as a longer term strategy. David Blake (Professor of Pensions Economics and Director of the Pensions Institute, Cass Business School) then made the case for why government should issue longevity bonds. This will improve the efficiency of the retail annuity market, enhance the hedging of aggregate risk in financial markets and provide a price discovery market for longevity risk currently lacking. The government has an important role to play because it is the only participant who can provide the required intergenerational risk sharing.

The third group of workshops at the start of the second day covered policy and regulatory issues, reverse mortgages and the related issues for this longevity product as well as modeling of longevity including econometric techniques and spatial modeling.

In the final plenary at the end of the conference, Marco Flores (Managing Director, Credit Suisse, London) provided a coverage of the longevity swap market and how these transactions actually work in practice and Michael Crane (Managing Director, Coventry Capital, UK) covered the regulatory developments in the life settlement market in the US, the “micro longevity risk” market. This was followed by a Panel session with Guy Coughlan (JP Morgan London), Morton Lane (Lane Financial Chicago), Brandon Lewis (Director, Capital Markets, Coventry Capital, Sydney) and Lawrence Tsui (Director, Life & Health, Swiss Reinsurance Company Ltd, Hong Kong) to discuss three topics: 1) Sustainable products/structures are being provided by innovation in the private sector for longevity risk management; 2) Active government support is required for the development of a wholesale and retail market in longevity risk, and 3) Education of investors is required to ensure the success of a market in longevity risk. It was generally agreed that the market is innovating and this is healthy for the future. Some aspects of government support would be welcome whereas the government taking on more longevity risk was less enthusiastically supported. Although education is important, some forms of education revolving around product sales and marketing were less beneficial.

The conference was made possible with the support of the excellent range of international speakers as well as financial support from the sponsors: PricewaterhouseCoopers, APRA, AIPAR, Coventry Capital, Swiss Re and the Institute of Actuaries of Australia. Support from the Pensions Institute at CASS Business School and the School of Actuarial Studies at UNSW resulted in a highly efficient administration of the event.

Future Longevity conferences are scheduled for Frankfurt in 2011, Toronto 2012 and Beijing 2013.

The Geneva Papers on Risk and Insurance - Issues and Practice will publish a Dedicated Issue of selected papers presented at the conference in October 2011. All papers will be subject to the journal review process.

Conference proceedings including presentation and papers are available from the web site

David Blake, Pensions Institute, Cass Business School and Michael Sherris, AIPAR, Australian School of Business, UNSW