In 2012 Deutsche Bank announced the largest longevity deal to date with the completion of a €12bn swap contract with Dutch insurer Aegon. The deal was significant not only for its size, but also the fact that instead of passing on the risk to reinsurers, Deutsche Bank passed it on to several anonymous investors – thought to be sovereign wealth and hedge funds – in the capital markets instead.
Aegon followed this up last year with a €1.4bn deal with Societe Generale, who packaged up the longevity risk from Dutch pension funds and passed them on to investors. The deal had a maturity of 20 years with a commutation covering exposures that run longer than 20 years.
Key to the success of this deal was an innovative medical-based longevity risk model provided by RMS LifeRisks, a company which began life in the catastrophe bond space. At the 20-year maturity of the transaction, the final payment is based on modelled scenarios that project mortality another 50 years into the future – allowing Aegon to hedge 70 years of longevity risk with a 20-year instrument.
RMS LifeRisks managing director Peter Nakada believes with the right modelling, the longevity market has huge potential. “This feels very much like the early days of the catastrophe bond market except that the potential size of the longevity market is at least five times larger than the market for natural catastrophe risk,” he adds.
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