What Does Longevity Derivatives Mean?

It is a relatively new class of securities product that secures a hedge against those people who are subject to longevity risks because of their businesses. A typical example would be pension scheme managers or insurers.

This particular derivatives type may be best characterized by having increased payouts in line with a certain population group living longer than expected originally.

The most common longevity derivatives type is called the longevity or survivor bond. This bond may be correlated with a coupon which changes its price according to the ‘survivorship’ of a certain group of people. In parallel with the increase of the mortality rate of the certain population, the payments of coupons decrease considerably, and they can even reach zero.

One should know that today the market of longevity derivatives involves even forwards, swaps, and option contracts.

Longevity Derivatives Explained

There are many reasons for which speculators purchase longevity risk from enterprises. One of the main reasons is that longevity risk is not correlated with such typical investing risks as market or currency risk.

Also there are many speculative ways of packing and repacking longevity derivatives to investors and insurance companies, but these are still to be developed and refined.