Mortality or other Insurance Bonds or Derivatives?

[blue sky]

I recently read that BNP Paribas issued a mortality bond with an embedded mortality option ... ie if expected lifespan increases then the coupon payments increased. (see article below)

Do people think there will ever be a liquid market?

Pension providers handed new protection 09/11/2004, 11:54:42
French Bank BNP Paribas has launched a new pension product designed to reduce the risk posed by ever increasing life spans.

Underwritten by the European Investment Bank, the Longevity Bond will be linked to the average survival rate of the population in England and Wales; effectively the payouts will reduce over time as the population shrinks.

Paribas explained: "We believe that the Longevity Bond is a landmark product in the risk management of pension funds, by offering a hedge against the unexpected changes in longevity."

Chris Hitchen, chairman of the investment committee of the National Association of Pension Funds, was quoted by the Daily Telegraph newspaper: as saying "Many pension funds are extremely worried about improvements in mortality and if there were some way of hedging we would be interested because it is a risk we find impossible to control."

Pension payments are likely to increase steadily in coming decades as the 'baby boomer' generation born at the end of the Second World War entire retirement.

[MetsMan]

Any indication as to how receptive Pension Schemes will be, given that the mortality improvements are linked to the General Population rather than to Pensioner mortality?

[Michael Davlin]

Who is the ultimate payor? How is that party going to fund this liability, and do its stockholders and creditors (or even managers) really understand this risk? Are there any credit guarantees involved to mitigate counter-party risks? What's the advantage of this instrument over simply buying tail mortality coverage, tailored to a pension plan's own mortality experience, from an informed reinsurer? Sure, there's a lot of capital outside the pension industry, but why go this route rather than soliciting coverage from existing reinsurers and letting those reinsurers go to the capital markets? I don't see why this should be such a compelling idea.

[Dr T Non-Fan]

Is it for matching annuities, or something of that nature? Reinsurance too boring of a word?

[Numbers Nerd]

Many reinsurers were approached by BNP Paribas about backing this bond over a year ago. There is still reinsurance behind the bond, with Partner Re backing the ultimate longevity risk. The idea is that UK companies would buy this bond to hedge some of the longevity risk in their massive blocks of payout annuity liabilities. The [small] size of this issue will not help the big companies.