Life Markets: Trading Mortality and Longevity Risk with Life Settlements and Linked Securities (Wile
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The new methodology, Difference in Curtate Life Expectancy DCLE , calculates the average difference between the actual and expected number of months lived, and is less biased than other methodologies. We also have assembled a strong internal medical team, which has allowed us to identify the major variables affecting life expectancies and not get distracted with secondary issues. Many thanks Reply 2 Like Follow 1 hour ago. Conversely, the mortality risk premium paid for taking the risk that people die sooner than expected is high - and you should go long mortality as an asset class. Mike Fasano mfasano fasanoassociates. Get a free 7 day subscription by clicking below! But there will also be a concrete advantage for companies able to use more mature workers; more older people than young may result in a cheaper price for each comparable unit of experience, for example.
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Dennis this is absolutely worked.. Many thanks Reply 2 Like Follow 1 hour ago. Reply 2 Like Follow 48 minutes ago. Albano Manna wow this is for free!!!!!!!!!! Reply 2 Like Follow 3 hour ago. But while equity managers agree on this, they can draw starkly different conclusions.
Maisonneuve sees generic drug manufacturers like Novartis or Teva as beneficiaries because they help to keep prices low. Others struggle to see how increasing competition and diminishing pricing power makes for a compelling investment. After all, the best way to save money on treating the seriously ill is to stop them getting seriously ill in the first place.
Life Markets: Trading Mortality and Longevity Risk with Life Settlements and Linked Securities [Vishaal B. Bhuyan] on bahana-line.com *FREE* shipping on. Another reason is that a traded mortality-linked security has to meet the different linked securities to transfer longevity risk to the capital markets. . market, which life insurers have long used to transfer part of their exposures, . The securitization of senior life settlements (i.e., policies issued to individuals.
The related area of efficiency savings in long-term care of the chronically ill could also prove important. Everyone seems to like Fresenius Medical Care, a leader in kidney dialysis, for example. These businesses with more specific products are more interesting to us that the more diversified big pharma names. He also picks out the preventative treatment trend. All of which underlines the prominence of political risk.
Obesity is set to emerge as a major cause of chronic ill-health for the coming generation of retirees, but how likely are governments to subsidise manufacturers of gastric bands? A similar caveat might be levelled at the idea of getting involved in healthcare and nursing infrastructure. Aviva Investors likes nursing homes and private hospitals enough to make them the focus of its Quercus Healthcare fund and AEGON Asset Management's property division is keen on long-term reversionary leases on healthcare infrastructure assets. But this sector has proven a dud in the past - a number listed in the UK during the s - and some believe that thinking of healthcare in terms of hospitals is looking in the rearview mirror.
His advice on healthcare infrastructure? And one way to take advantage of the more efficient, user-friendly kit turned out by the likes of Fresenius will be to carry out more treatment in the home.
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The generation retiring today enjoys considerable asset wealth, decent pensions, long experience of a globalised leisure and consumer society and good health - the source of their improving longevity. But we should think about how this leisure story collates with the healthcare story. The person taking their bed bath from the home nurse is clearly not cruising the Mediterranean. Or at least, they might be the same person, but getting from one to the other will take 30 years - a cohort effect that any demographics-led equity strategy will have to negotiate.
Moreover, even if these retirees do spend four weeks on safari in Kenya, that leaves 48 weeks at home, spending more on prosaic things like food, utility bills and, yes, healthcare. For the majority who will not be able to afford the dream holidays this counts double. It's a salutary reminder that investors should not neglect the basics, particularly if they believe that governments will withdraw from centralised healthcare and rely more on community networks and families. Providers of retirement products, ranging from insurance companies through asset managers to private banks and IFAs, should be able to capitalise on a clientbase growing not only thanks to ageing, but to corporate-sponsor withdrawal from pensions.
Annuity providers may be particularly well-positioned should an older population demand higher interest rates, boosting asset values against liabilities. Long ageing risk, short sector risk One reason leisure, private healthcare and financial services come up so often in demographics-led equity portfolios is probably because these funds go, understandably, where the margins are. They reflect how to make profit from the older generation, focusing on revenue from the wealthier people, rather than the older generation as a whole - let alone the particular profile of any pension scheme.
This presents a problem for any investor thinking they might offset some of their liabilities' longevity risk. But it's also somewhat strange to see these sector biases: We can see this if we consider how the increasing dependency ratio will sweep its way through the economy. Some argue that a reduced supply of workers will result in redistribution of returns back away from capital and towards labour. In this environment, such economic growth and return on equity as there is will come from those enterprises best able to boost productivity by, for example, specialising in high-technology manufacturing or services.
Life Settlements and Longevity Structures: Pricing and Risk Management
This will become a particular point of advantage now that the productivity gains available from exporting less scaleable labour via offshoring or immigration appear to have run their course - "Chinese labour is three times as expensive as it was 10 years ago," as Falle at LVAM observes. If higher productivity figure 4 is one solution to the increasing dependency ratio, longer working lives is another.
To some extent this will evolve naturally - as we live longer we will simply be less able to afford early retirement, and we may be tempted to stay on if it is true that labour costs are on the way up. But there will also be a concrete advantage for companies able to use more mature workers; more older people than young may result in a cheaper price for each comparable unit of experience, for example.
Schneider at RCM notes that BMW has an experimental plant in Germany dedicated to figuring out how best to configure car manufacturing for an ageing workforce - which gives first-mover advantage to BMW, of course in a sector whose revenues are not associated with the overs , but also opportunity for a range of firms to develop technologies for that plant. As Maisonneuve at Schroders puts it: The nurses demand ever-higher pay, but there is a limit to the number of patients they can see in one day.
Optimising for the ageing demographic risk premium, in other words, should be achieved not only within sectors but also across sectors, regardless of whether or not revenues ultimately come from that demographic. Indeed, this becomes obvious as one understands that the ageing demographic can be the source of revenue, of capital, of labour, or of all three, for any business in any industry.
For this reason, the pension scheme that wants to maintain sector weights close to its benchmark's might prefer some kind of ageing demographic overlay rather than one of the available demographics-led thematic strategies. Despite their managers' claims of diversification they tend to take predictable sector bets.
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Schroders' Demographic Opportunities portfolio has big overweights in healthcare and consumer stocks, and its biggest underweight is IT, an attractive sector in its own right at the moment, but also a key potentia l beneficiary of the productivity drive. Long time horizon - long ageing risk? But even if we think we can isolate the ageing demographic risk from sector risk, if we try to get it via equities we certainly expose ourselves to all sorts of other risks - chiefly equity risk, of course. Still, ultimately that equity must be a claim on Swiss Re's revenues - why else would anyone buy them?
It might take a long time for the long-mortality risk premium to come through in the price, but it must happen eventually. That should be no more controversial than to claim that the equity risk premium will be paid, eventually. If our starting assumption is correct and the mortality risk premium is under-valued, we should be paid that premium over and above any positive or negative equity risk premium we receive.
This is undeniably a growth opportunity, and like all growth the risk is that it appears in the price all at once thanks to an onrush of capital. This will determine the size of the ageing demographic risk premium at any point in time - and, for any kind of offsetting of liability-related risk the more its delivery matches the pace of change in unexpected longevity improvements, the better. In this context, this particular form of growth investment might, indeed, have some appealing characteristics.
This growth should "come through in stages rather than in bubbles", suggests Frances Hudson, global thematic strategist at Standard Life Investments, "because demographics change very slowly".
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Schneider at RCM notes that analysts outside those covering life insurance are not focused on this theme because they simply cannot take such a long-term view. Batrell at Lombard Odier says that the Golden Age fund's companies do not show higher valuation multiples than comparable sector peers. If the market re-rates tomorrow we will still benefit from the superior growth of our companies, but we would like to see this play out over time.
If life expectancy continues to be revised upwards, the longevity risk premium will continue to be low and the mortality risk premium high. If this is true in the pure life risk market, it will be true in the equity market too, even when its analysts begin seriously to price in demographic risks. How could it be any other way, if the market's only sources on longevity assumptions are the experts who continually undershoot?
Of course, in the short term equity cash flows will not look like longevity-hedge cash flows. But over the long term the risks ought to converge, and there may be reason to believe re-rating of stocks should come as upside surprises that exhibit some correlation with periodic revisions to longevity projections - assuming that the demographic risk premium can be identified and optimised.
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