New Asset Class: Taking a Punt on Mortality

Predicting how long people will live is a perplexing and potentially pricey issue for pension funds and insurers across the world. Longevity risk – which is under pressure from a population aging in an uncertain way – is now giving rise to a new asset class. Investment banks are seizing the opportunity to make money from betting on mortality with longevity swaps and soon-to-be-tradable longevity bonds. With US$23 trillion in pension liabilities globally, taking the risk to the capital markets makes sense and it has a diversifying appeal for investors. But for its insurers and super funds to reap the benefits of these new assets, Australia needs to get moving on an annuities market and longevity index.