On the Failure (Success) of the Markets for Longevity Risk Transfer

19 Pages Posted: 14 Apr 2017

See all articles by Richard D. MacMinn

Richard D. MacMinn

National Chengchi University; The University of Texas

Patrick L. Brockett

University of Texas at Austin - Department of Information, Risk and Operations Management

Date Written: April 2017

Abstract

Longevity risk is the chance that people will live longer than expected. That potential increase in life expectancy exposes insurers and pension funds to the risk of not having sufficient funds to pay a longer stream of annuity benefits than promised. Longevity bonds and forwards provide insurers and pension funds with financial market instruments designed to hedge the longevity risk that these organization face. The European Investment Bank and World Bank have both discussed longevity bond issues, but those issues have failed due to insufficient demand. Forward contracts have also been created, but that market remains dormant. The extant literature suggests that these failures may be due to design or pricing problems. In this article the analysis shows that the market failure is instead due to a moral hazard problem.

Suggested Citation

MacMinn, Richard D. and Brockett, Patrick L., On the Failure (Success) of the Markets for Longevity Risk Transfer (April 2017). Journal of Risk and Insurance, Vol. 84, Issue S1, pp. 299-317, 2017, Available at SSRN: https://ssrn.com/abstract=2952795 or http://dx.doi.org/10.1111/jori.12205

Richard D. MacMinn (Contact Author)

National Chengchi University ( email )

Taipei
Taiwan

The University of Texas ( email )

2317 Speedway
Austin, TX 78712
United States

Patrick L. Brockett

University of Texas at Austin - Department of Information, Risk and Operations Management ( email )

CBA 5.202
Austin, TX 78712
United States

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