Comments on: The longevity trend bond arrives A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: FelixSalmon Tue, 28 Dec 2010 15:15:23 +0000 Thanks David!

Would love to know more about those three wealthy Canadians…

By: TFF Tue, 28 Dec 2010 12:11:48 +0000 Thanks, David, very informative!

By: Danny_Black Tue, 28 Dec 2010 07:11:21 +0000 DavidMerkel, no need to apologise for your usual high standard post….

Hope the new business is going well.

By: DavidMerkel Tue, 28 Dec 2010 04:39:37 +0000 A few notes — both annuitants and those with life insurance antiselect. Healthier people buy annuities, sicker people by life insurance. That difference gets more significant with the amount of time past underwriting, making the mortality risk hedge of writing the two poor. Yes, there is a macro hedge in terms of some sort of catastrophe like the 1918 avian flu, but aside from massive events like that, variations in the overall death rate are swamped by the antiselection effect.

Second, in terms of assets, annuities of all sorts are bigger. But most annuities are used as complex savings accounts. Only 0.5% of them get annuitized. Agents never want clients to annuitize, because then they can never earn another commission on that money again.

So, there are never enough annuities with longevity risk to balance of a book of life insurance with mortality risk, even if that hedge did work. Now there are structured settlements also, but that’s a specialized business that few do well at.

Third, annuities are written as relatively short liabilities. Mix that with life insurance and other long liabilities, and the investment department can work wonders, because it is investing against a long ladder of payments, which allows for clever and opportunistic purchases and sales of assets. A long ladder is a thing of beauty!

Fourth, there is a kind of dedicated buyer base for Cat insurance risk. The High Yield community goes gaga for this stuff, because the risk is uncorrelated with the credit cycle, and few of these deals go bad.

Fifth, if you are a major life reinsurer (a part of the oligopoly), you have a happy life but a major problem. There are few willing to do retrocessional cover, and from my last talk with the CEO and CFO of RGA, it is dominated by three wealthy Canadians who talk to each other, forming a cartel of sorts. So, if you want to dispose of excess mortality risk as a reinsurer, your options are very limited.

I’m sorry Felix, was this longer than your post? My days as an actuary and buy side analyst still cling to me.

Looking forward to seeing you someday soon.

Full disclosure: long RGA

By: khumphrey86 Mon, 27 Dec 2010 22:38:00 +0000 @ Felix and TFF,

…Also, the annuity biz has loads of competitors (e.g. Mutual funds, CDs, mattresses).

Thanks Felix, this is interesting, and I never heard of this. I was thinking about “Catastrope” bonds while reading this.

I guess insurance cos. could issue securities against any peril. There are still a number of yield chasers out there.

By: TFF Mon, 27 Dec 2010 22:13:25 +0000 Thanks, Felix. I wasn’t aware of that. I could guess at some reasons…

* Annuities depend on the accumulation of substantial savings, something most people have trouble doing.

* Pensions and Social Security meet much of our societal need for annuities, limiting the market for private annuities.

* People often buy life insurance for poor reasons, or buy more years of insurance than they truly need. Whole life policies are often inappropriately marketed.

The funny thing is that I would *think* that this imbalance would tend to improve the returns on annuities. If there is a large unmatched life insurance liability just begging for an annuity to balance it, then somebody willing to purchase an annuity ought to get generous terms. Yet the payout schemes I’ve seen seem to equate to a negative real return.

By: FelixSalmon Mon, 27 Dec 2010 21:53:36 +0000 Actually, @TFF, the annuity business has always been a small fraction of the size of the life-insurance business. It’s weird, I’m not entirely sure of why that should be.

By: TFF Mon, 27 Dec 2010 18:39:55 +0000 Haven’t insurance companies been doing this for ages? Writing life insurance with one hand, issuing annuities with the other? Why does Swiss Re need to purchase exposure? Is this an attempt to expand beyond their organic growth?

By: Suncaked Mon, 27 Dec 2010 17:38:17 +0000 I wonder which population data this will be based on…

And at least insurance firms have learned a lesson from the previous crisis – instead of using a total return swap from Lehman like a lot of ILS pre-2008, the collateral is securities issued by the International Bank for Reconstruction and Development.