Living with mortality: longevity bonds and other mortality-linked securities
This paper addresses the problem of longevity risk - the risk of uncertain aggregate mortality - and discusses the ways in which life assurers, annuity providers and pension plans can manage their exposure to this risk. In particular, it focuses on how they can use mortality linked securities and over-the-counter contracts - some existing and others still hypothetical - to manage their longevity risk exposures. It provides a detailed analysis of two such securities - the Swiss Re mortality bond issued in December 2003 and the EIB/BNP longevity bond announced in November 2004. It then looks at the universe of hypothetical mortality-linked securities - other forms of longevity bonds, swaps, futures and options - and investigates their potential uses. Keywords:longevity risk; longevity bonds; mortality swaps; annuity futures; mortality options; mortality swaptions; survivor caps; mortality indices; liquidity; basis risk; credit risk.