Reuters reported recently that Swiss Re was launching a series of longevity bonds to hedge the reinsurer against longevity catastrophe risk. The bonds – issued through Caymans-based Kortis Capital on behalf of Swiss Re – would hedge Swiss Re against relative changes in the mortality of US males aged 55-65 and UK males aged 75-85 over the next 8 years.
Some have compared this with the EIB/BNP Paribas longevity bond withdrawn before launch a few years ago, but there are clear differences. The EIB bond was designed to offer pension schemes an investment with which they could hedge their longevity risk – at a price; the Swiss Re bond, on the other hand, offers a premium to investors willing to assume some longevity risk from Swiss Re.
Indeed, the longevity risk taken on is only going to be a hedge for an investor with a very specific mix of UK and US longevity assets and liabilities – this is certainly designed to be an uncorrelated investment for multi-asset investors.
However, how much risk does this actually transfer? The risk with longevity is that the rate of improvement is greater than expected, so the trajectory of future mortality rates follows a steeper downward path than expected. This means that the exposure from changes in mortality rates over the next few years is trivial – it is only in the distant future that the cash flows reflect the value of the increased longevity exposure.
If this is the case, then why launch such a bond series? One answer is that you’ve got to start somewhere. Investors are unlikely to have much of an appetite for a 20-year longevity bond issue, with no experience of this type of investment. However, if investors become comfortable with an 8-year issue, then a 10-year issue may follow, then a 12-year issue, and so on.
However, another reason is that regardless of the economic risk transferred, a transfer of these risks has a desirable impact on the economic capital required to write longevity business in the UK and the US. In particular, this deal is likely to have been entered into by Swiss Re because the cost of hedging these risks in terms of the premium paid to investors is less than the benefit it receives in terms of a reduced economic capital requirement – and that has always been one of the key attractions of securitisation.
