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DISCUSSION PAPER PI-1207

Keeping Some Skin in the Game: How to Start a Capital Market in Longevity Risk Transfers

David Blake and Enrico Biffis

The recent activity in pension buyouts and bespoke longevity swaps suggests that a significant process
of aggregation of longevity exposures is under way, led by major investment banks and buyout firms
with the support of leading reinsurers. As regulatory capital charges and limited reinsurance capacity
constrain the scope for market growth, there is now an opportunity for institutions that are pooling
longevity exposures to issue securities that appeal to capital market investors, thereby broadening
the sharing of longevity risk and increasing market capacity. For this to happen, longevity exposures
need to be suitably pooled and tranched to maximize diversification benefits offered to investors and
to address asymmetric information issues. We argue that a natural way for longevity risk to be
transferred is through suitably designed principal-at-risk bonds.