Philippe TRAINAR

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• Philippe TRAINAR
• Chief Economist Officer of SCOR

Workshop INSEE-CREST AXA Fondation du
Risque 1st of February 2008
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• An impressive work has been done on pricing
  longevity / mortality risks / bonds but why
  should we issue longevity / mortality bonds ?

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Why securitization of longevity / mortality risk
?

• Dispersion of risks
• A complement after pooling of risks, i.e. after
  (re)insurance
• A way for further reducing the risk premium
• Fragmentation of risk gt risk premium ? 0
• But not operational as long as (re)insurer are
  providing the liquidity
• Clearing of the market
• Imperfect information of insurers
• A way to force the market to reveal further
  information
• Emergence of unknown pooling dimension
• But not operational as long as (re)insurer are
  providing the liquidity

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Main problems of mortality / longevity bonds

• Problems of mortality risk
• Deviation of the trend (cf. consequence of
  obesity)
• A progressive risk gt no intertemporal pooling
• A contained risk (quantitatively) gt transfer
  easily conceivable
• One off deviation (cf. avian flu)
• Nature of a cat event
• No structural problem for transferring it to the
  market (cf. graph)
• Problems of longevity risk
• One off deviation an opportunity not a risk
• Deviation of the trend (cf. unanticipitated
  lengthening of life)
• A progressive risk gt no intertemporal pooling
• A systemic risk gt pooling with other risks
  difficult
• Everyone potentially concerned
• On its asset as well as its liability sides
• A massive risk (pensions funds 20 trillions
  1/3 financial market)

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Life bonds an increasing volume of mortality
Source Sigma research, swissRe
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Main problems of mortality / longevity bonds

• Dimensions of mortality risk
• Deviation of the trend (cf. consequence of
  obesity)
• A progressive risk gt no intertemporal pooling
• A contained risk (quantitatively) gt transfer
  easily conceivable
• One off deviation (cf. avian flu)
• Nature of a cat event
• No structural problem for transferring it to the
  market (cf. graph)
• Problems of longevity risk
• One off deviation an opportunity not a risk
• Deviation of the trend (cf. unanticipitated
  lengthening of life)
• A progressive risk gt no intertemporal pooling
• A systemic risk gt pooling with other risks
  difficult
• Everyone potentially concerned
• On its asset as well as its liability sides
• A massive risk (pensions funds 20 trillions
  1/3 financial market)

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Who may be counterparty for longevity ?

• Institutional investors ?
• Pension funds
• Main source of longevity risk transfer
• But internal capacity to manage intergenerational
  risk sharing
• (Re)insurance
• Hedging (longevity and mortality) pooling
  capacities but limited
• Potential source of longevity risk transfer
• Financial markets ?
• Drug, leisure, LTC companies gt limited
  capacities
• Households gt potential sellers because of
  increased longevity
• Longevity main source of households saving
• Asset selling gt fall of assets prices
  Increase of interest rates
• Other actors ?
• Governments ?
• Overexposed to longevity but able to impose
  intergenerational solidarity
• Limited capacity through sovereign wealth fund
  (from DC EC)
• Young generations ?
• More borrowers than lenders
• As much exposed to longevity risk as older
  generations

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How much transfer of longevity risk ?

• All longevity deviation ?
• Prior use of own and (re)insurance absorption
  capacities
• No sufficient counterparties
• Only possible for SMIs
• Longevity gap in relation to deviation vs trend
  ?
• Manageable for random gaps
• Need an independent longevity index
• Need to isolate exclude the antiselection part
  of the risk
• Probably insufficiently ambitious
• Gap with regard to a standardised risk sharing
  formula ?
• Give incentive for exploiting internal capacities
• Highly complex to be design and accepted
• Probably more accurate but difficult
• Hybrid longevity financial risk debt (cf.
  Pauline Barrieu) ?
• More attractive for investor
• Less attractive for issuer because of
  longevity-financial correlation
• Different kinds of hybrid product to be tested

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• Four successive steps
• - Exploit all internal capacities of
  intergenerational pooling
• - Exploit all reinsurance pooling capacities
• - Think about securitizing part (which one) of
  the residual
• - Search for potential hybrid product

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