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Longevity Insurance

Longevity Insurance

Longevity insurance is designed to protect pension funds against the costs of its pensioners living longer than expected. In 2006, there were reports that the global market in trading the “longevity risk” faced by pension funds could eventually outstrip the huge credit derivatives market. However, it took until 2009 for the concept to be first launched when Babcock International and RSA in the UK became the first companies to take out longevity insurance—with Credit Suisse and Rothesay Life, a unit of Goldman Sachs.

Longevity insurance is likely to be of most interest to large companies, given the time and resources required to implement these schemes. Life expectancy in Western countries has steadily increased over the past few decades, leaving pension funds exposed to the risk that their life expectancy assumptions are insufficient, with the result that pension provision costs them more than they had assumed.

The concept is now spreading away from the UK to other countries. In February 2010, for example, the UK arm of BMW of Germany insured £3bn (US$4.5bn) of its liabilities with Deutsche Bank, in what is the largest longevity insurance deal to date.

The potential demand for longevity insurance is so great that the insurance markets alone are insufficient. In 2010, banks and insurers in the UK established a body that will try to develop a market in longevity swaps to meet demand. The Life and Longevity Markets Association aims to create an international market where insurers can hedge out longevity risks when taking on corporate pension risks.

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