How much is a pool of life-contingent assets or liabilities worth?Depending on your views on longevity extension, today's value of the pool will vary. A pension plan sponsor may believe that today's value of its liability is $8 billion, yet the market may want $12 billion. An insurance company might believe each life insurance policy written has, on average, a positive net present value to the insurance company at creation, yet investors who buy other people's life insurance policies believe at least some policies have value to the investor.
Is the difference in opinion significant? Views on future longevity vary so widely that what appears under one view to be an asset can under another view be a liability. If you are a shareholder of an insurance company, pension plan sponsor, annuity issuer or a limited partner of a fund looking to acquire these assets or liabilities, you may want to learn more.
SwapsMarket provides dynamic pool-specific information about life-contingent assets and liabilities, for example: pools or groups of related pools of deferred annuities, pensions or life insurance.
Many pools of life-contingent assets and liabilities do not correlate well with broad-based or representative sample longevity indices. SwapsMarket information includes pool-specific indices that reference mortality projections and net cash flow projections that have high correlations to the pools themselves.
ICAP Capital Markets LLC provides accredited investors the possibility to trade each pool's longevity risk through an over-the-counter exchange. The types of agreements include: cash-margined and cash settled longevity swaps whose value is linked to pool-specific index values.
The following chart contrasts two points of view about expected mortality. One view is typical of that held by insurance companies that underwrite policies that later (or in some cases immediately) constitute pools of life settlement contracts. The other view is typical of an investor who purchases the pool. The source data for each probability density function is real, although it has been aggregated to remove any similarity to individuals or to a particular pool:
Unless a pool of life settlement contracts has thousands of individual lives, mortality risk is significantly higher than that implied by smooth mortality distributions prepared from tables. Pool owners today frequently have multiple life settlement contracts issued on the same insured individual.
Expected mortality volatility: pool size of 70
Multiple life settlement contracts issued on the same insured increase mortality risk for the pool owner. Mortality risk refers to the volatility of expected mortality, or put another way, the degree by which an actual mortality distribution will differ from a projection or estimate.
