The longevity market is expanding

The micro longevity market has seen tremendous growth in the last few years.  The life settlement industry is now worth of $16 billion with market analysts predicting further growth over the next two years to $21 billion.

Macro longevity is similarly set for massive expansion. An increasing number of pension providers and insurance companies are entering into longevity swap transactions to transfer their exposure to longevity risk to the capital market - a market opportunity currently worth around £900 billion in the UK with a number of landmark deals in 2009 totalling around £7 billion.

The emergence of synthetics

The micro longevity products initially consisted exclusively of physical life settlements. These first generation assets have been complemented by a range of synthetic instruments linked to the survival of the reference pool of lives including swaps and longevity linked notes as well as longevity indices.  These synthetic vehicles resemble transactions on equity indices in that the range of underlying assets achieves diversification and allows an investor a faster scale up of portfolio compared to buying the underlying assets individually. 

The attraction of using synthetics is that they enable the customisation of the expected cash flows and, as a consequence, can potentially improve the liquidity of a fund, whilst greatly mitigating speciality risk such as origination risk, foreign exchange and potential tax issues.