The Life and Longevity Markets Association, which launches Monday, aims to take instruments known as longevity swaps into the mainstream. Most of these deals have so far been private, over-the-counter transactions between insurers and reinsurers.
The initiative, which involves Deutsche Bank AG, J.P. Morgan Chase & Co.'s J.P. Morgan, and Royal Bank of Scotland PLC, as well as insurers Axa SA, Legal & General Group PLC, Pension Corp., Prudential PLC and Swiss Re, aims to replicate the success of insurance-linked securities markets. These enable insurers to pass on some of the risk from unforseen events, such as natural disasters, to outside investors like hedge funds.
John Fitzpatrick, a partner and director of Pension Corp. and a director of the LLMA, said the group wants to produce "standardized products that will attract investors and to create a liquid market," along the lines of the way the markets for interest rate swaps and inflation swaps developed.
Jonathan Graham, head of pricing at Swiss Re, said: "Longevity capacity exists within the insurance market at present but there simply isn't enough to cover the long-term future needs." There is currently about £2 trillion (about $3.2 trillion) of liabilities in the U.K.'s pension funds.
Last year, engineering firm Babcock closed a pioneering longevity swap with Credit Suisse, covering itself against unexpected bills if its pensioners live longer than predicted. More are expected to follow suit and the market could be worth £10 billion in the U.K. this year, according to some estimates.
Most of the new association's members have signed similar deals, but want to standardize and formalize the way they work to encourage wider participation.