"Two's a coincidence," the old adage goes; "three's a trend." So when Goldman Sachs Group Inc. recently introduced a longevity and mortality index, it seemed to be the start of a movement. Goldman joined JPMorgan Chase & Co. and Credit Suisse First Boston in a drive to create a tradeable market for a new breed of derivatives that would hedge the risks associated with lengthening lifespans. The goal, explains Alex Dubitsky, head of Goldman's longevity markets group, is to create transparent pricing for these newfangled instruments.
It's the type of product that defined benefit (DB) pension plan sponsors dream of, providing the ability to lay off what could become a plan's most volatile risk given the demographic bulge about to enter retirement age. "The potential for exposure is enormous," notes Jesse Schwartz, consulting actuary at Watson Wyatt Worldwide, which helped JPMorgan develop its LifeMetrics Index.
The Goldman product is an index swap that plan sponsors, insurers and reinsurers might use, once the market is developed, to replace other corporate efforts to spread risk. Initially, the index would more likely be used as just another investment vehicle.
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For now, though, the idea of a real-time, tradeable market, as Goldman envisions it, may be years off, observers say. "Interest is continually growing, and it will be a useful tool at some point, but not for a few years," says Jon Waite, chief actuary for SEI Investment Co.'s investment group. None of the dealers would comment on demand for the indexes, but observers think there still may be too many unanswered questions.
For starters, because life expectancy varies regionally and among genders, an index has to approximate a plan's specific demographics to be effective. "To the extent that the index is not correlated to an entity's longevity risk, there will be basis risk," says Sandra Guiffre, a principal at GA Capital, a risk-transfer solution boutique in Wilton, Conn. GA Capital is also developing products that lay off the actual risk–not an index of risk–to a third party.
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