Longevity swaps are still in their infancy, but if the market takes off, it could spawn a new career niche for professionals with actuarial backgrounds.
Longevity swaps are derivatives contracts whose value is tied to the life expectancy of pensioners and life-insurance policyholders.
This week the Life and Longevity Markets Association launched with the goal of creating a secondary market for these instruments, which so far have been few and far between. The market is still emerging but reportedly could reach £10 billion in the U.K. this year.
Currently fewer than 200 people in the world work in the business, primarily at banks and insurance companies, estimated John Fitzpatrick, a partner and director of Pension Corp. and a director of the LLMA.
But liquid trading could mean demand for professionals from investors, such as hedge funds, to evaluate the merits and risks and returns of these products and companion life-insurance products.
Even so, the specialty is likely to be a very narrow field. "Nowhere near the level of labor that I would expect exists in the life-settlements business, where you're moving individual policies," Fitzpatrick said.
The association is determining a standard document to define such terms as the collateralizations, indices, evaluation procedures and other factors for when there are changes in longevity.
"All of those things would create a product that is more easily transferable than what exists today," Fitzpatrick said. "What's been done so far is small and custom-made, and it's been difficult for an investor to trade it to another investor. To the extent that we can create a liquid traded market should create greater capacity for the pension system to address what is the most significant risk they face -- longevity in the long run."
Write to Laura Lorber