Informed intermediation of longevity exposures

Transcription

1 Informed intermediation of longevity exposures Enrico Biffis Finance and Accounting Group Imperial College David Blake Pensions Institute Cass 17 th Colloquium of Superannuation Researchers Sydney, July 7, 2009 Motivation Buyout market ILS market Conclusion 1 / 17

2 Agenda 1 Motivation 2 Buyout market 3 ILS market 4 Conclusion Motivation Buyout market ILS market Conclusion 2 / 17

3 Motivation: longevity hedging demand/supply Insurance markets have very limited capacity DB schemes / annuity providers have longevity risk exposures roughly 30x larger than insurance industry s exposure to mortality deterioration Longevity space attractive to investors ILS funds, endowments, investment banks, (re)insurers, etc. Information market is developing bespoke mortality tables, postcode analysis, credit history, granular underwriting data (life settlements) Motivation Buyout market ILS market Conclusion 3 / 17

4 pension funds buyout firms (re)insurers, banks capital markets (ILS funds, etc.) (re)insurers Motivation Buyout market ILS market Conclusion 4 / 17

5 Agenda 1 Motivation 2 Buyout market 3 ILS market 4 Conclusion Motivation Buyout market ILS market Conclusion 4 / 17

6 The pensions buyout market less informed pension funds more & less informed higher capital requirements buyout firms (re)insurers, banks capital markets (ILS funds etc.) (re)insurers Motivation Buyout market ILS market Conclusion 5 / 17

7 Capital/information differentials DEATH PROBABILITY FORECAST age 70 age 75 age YEAR Motivation Buyout market ILS market Conclusion 6 / 17

8 Transferring a survival rate, S = 1 m m i=1 1 τ i >T 0.15 EXPECTED PROFIT of LESS INFORMED BEST ESTIMATE CAPITAL REQUIREMENTS BUYOUT PRICE Motivation Buyout market ILS market Conclusion 7 / 17

9 Transferring a survival rate, S = 1 m m i=1 1 τ i >T 0.15 EXPECTED PROFIT of LESS INFORMED BEST ESTIMATE CAPITAL REQUIREMENTS % of MORE INFORMED BUYOUT PRICE Motivation Buyout market ILS market Conclusion 7 / 17

10 Transferring a survival rate, S = 1 m m i=1 1 τ i >T 0.15 EXPECTED PROFIT of LESS INFORMED BEST ESTIMATE CAPITAL REQUIREMENTS % of MORE INFORMED BUYOUT PRICE Motivation Buyout market ILS market Conclusion 7 / 17

11 Bulk buyout / pool and transfer AVERAGE BUYOUT PRICE SEPARATE TRANSFER 0.78 POOL AND TRANSFER % 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% % OF MORE INFORMED BUYOUT FIRMS Motivation Buyout market ILS market Conclusion 8 / 17

12 Agenda 1 Motivation 2 Buyout market 3 ILS market 4 Conclusion Motivation Buyout market ILS market Conclusion 9 / 17

13 The ILS market more informed high capital requirements pension funds buyout firms (re)insurers, banks more informed high capital requirements (re)insurers less informed capital markets (ILS funds, etc.) Motivation Buyout market ILS market Conclusion 10 / 17

14 Optimal security design Transferring S to the capital markets intermediary retains part of the exposure to signal the quality of the cashflows to the investor risk-sharing in securitization, quota-share reinsurance Write a contract on the exposure S assume full collateralization: write C = φ(1 S), with φ( ) non decreasing optimal contract design C = min(q,1 S) = q max(0,s p ) higher q = 1 p, higher longevity risk protection Motivation Buyout market ILS market Conclusion 11 / 17

15 Pool and tranche EXPECTED PAYOFF PER EXPOSURE POOL AND TRANCHE TRANCHE SEPARATELY TRANCHING LEVEL Motivation Buyout market ILS market Conclusion 12 / 17

16 Pool size EXPECTED PAYOFF PER EXPOSURE TRANCHING LEVEL Motivation Buyout market ILS market Conclusion 13 / 17

17 Capital requirements EXPECTED PAYOFF PER EXPOSURE HIGHER CAPITAL REQUIREMENTS LOWER CAPITAL REQUIREMENTS TRANCHING LEVEL Motivation Buyout market ILS market Conclusion 14 / 17

18 Agenda 1 Motivation 2 Buyout market 3 ILS market 4 Conclusion Motivation Buyout market ILS market Conclusion 15 / 17

19 Conclusion We have examined some aspects of optimal longevity risk transfers differentials in information / capital requirements pool and transfer vs. pool and tranche see Sherris and Wills (2008) for proper numerical analysis Understanding of underlying exposures is crucial LifeMetrics, Xpect, etc., but mortality forecasting very challenging Market participants needs are equally important so far mainly cashflow hedges (insurance paradigm) informed intermediaries can bridge the gap with value hedge suppliers Motivation Buyout market ILS market Conclusion 16 / 17

20 Conclusion THANKS FOR YOUR ATTENTION Motivation Buyout market ILS market Conclusion 17 / 17