The longevity market is expanding

The micro longevity market has seen tremendous growth in the last few years with physical life settlement transactions increasing in face value terms from $2.5 billion in 2003 to $15.5 billion in 2007 with the market expected to grow further to approximately $31 billion in 2017.

Macro longevity is similarly set for massive expansion. Pension funds seeking to offload their longevity risk - a market opportunity currently worth around £900 billion in the UK - are entering into longevity swap transactions to hedge their exposure to longevity risk with some recent deals worth around £500 million.

The emergence of synthetics

Historically, micro longevity products were constructed around physical life settlements. However, these first generation assets are now complemented by a range of synthetic instruments including swaps, longevity linked notes and longevity indices with risk profiles linked to the survival of the reference pool of individuals.

The attraction of using synthetics is that they are both standardised and tradable and so can potentially improve the liquidity of a fund. They offer all the benefits of investing in longevity such as low market correlation, low volatility and attractive returns, and allow a more rapid scale up of a portfolio, without all the challenges faced by investing in cash life settlements, such as achieving diversification in the portfolio and avoiding sourcing, origination and potential tax issues. What to look for in longevity fund.