Over the weekend, the Financial Times ran an article reviewing the threat of changes in mortality rates (or the estimation thereof) on life insurance, dating back from the old tontine schemes of the 17th centrury, up through the uncertainties raised about pandemic risk and pension funding shortfalls.
Over on the P&C side of the insurance house, some insurers have dabbled in the securitization of catastrophe risk, as a means to gain access to additional risk capacity as well as investors who might wish to diversify their portfolios.
It sounds like the life and pension folks are starting to get into the act too:
Insurance companies have followed suit, launching “mortality bonds” that bet on whether death rates will rise - usually due to something such as bird flu. Axa, the French insurance group, issued one of these last year where investors purchased bonds, and received a cash flow with a value that fell if the level of deaths among Axa policy holders rose. The price of a mortality bond is thus tied into the chance of a pandemic.
Now people in the capital markets are wondering whether this idea can be applied further. If bond purchasers are willing to bet against catastrophe or mortality, why not longevity? A couple of years ago, the European Investment Bank and BNP Paribas made one attempt to do just that. The EIB marketed a 25-year bond, worth £540m, which produced cashflows that were designed to be a mirror image of a pension fund’s liabilities for a hypothetical pool of 65-year-olds. The details of the scheme were complex, but the essential idea was that the payout to bondholders would fall each year, according to the rate of deaths. In other words, the higher the death rate, the less money the bondholders would receive. The investors were expected to be pension funds looking for a way to balance their risks.
The article mentions that the longevity bond described in the second quoted paragraph hasn’t caught on yet, presumably due to the complexity of the risk.
Combine that with the report several months ago that Axa was securitizing the risk of part of its auto insurance book, I can’t help but wonder if in a few decades, insurers and agents might be reduced to being essentially brokerages, writing policies that are then bundled and re-tranched into securities sold in the capital markets.