The Market in Death

Generali

Apparently, Wall Street's latest wheeze is derivatives based on longevity:

http://www.theatlantic.com/business/archive/2011/05/death-derivatives-has-wall-street-finally-gone-too-far/239091/

They sound just like what they are: investors would essentially bet that people will die sooner than later. This idea certainly sounds morbid at best and morally repugnant at worst. Essentially, those investors would profit from untimely death. Is it wrong for banks to create such products?

What's a Death Derivative?
First, a little more explanation is warranted here. The investor side of the bet has already been described. On the other side of the transaction would be pension funds that worry their clients are going to live longer than anticipated and consequently collect more payments than their accrued balance would provide for. If the people in question die quickly, then investors get paid. If people live longer, then the pension funds are covered. Think of death derivatives as a way for pension funds to hedge against their clients living a very long time. [continues]

Conrad

Not sure this is much different to that which insurers and anuity providers have traded in. Actuaries spend thier time balancing the input / output equations and make premiums accordingly. I think the article is announcing a derivatives trade in this endeavour then.

Howz Aus btw?

Generali

Conrad wrote: »

Not sure this is much different to that which insurers and anuity providers have traded in. Actuaries spend thier time balancing the input / output equations and make premiums accordingly. I think the article is announcing a derivatives trade in this endeavour then.

Howz Aus btw?

Kinda. It's a bit different because you can take a direct financial interest in how long a group of people will live and trade that position.

Aus is going ok. Winter has begun which is a pretty boring time of year in Sydney as everyone just goes inside and wimps out on life. Looking forward to my trip to Pomland in a few weeks, that'll be fun.

purch

Completely bonkers :eek:

gagahouse

why bonkers? unless you think an investor will have some way of "speeding" up the underlying pensioner's deaths?

oscarnyc 1 day ago
the obvious benefit would be to the pensioners, in 2 ways. #1) The trustees would have certainty of the worst case scenario, so they can more accurately plan and should be able to pay out more. #2) It decreases the risk of the pension fund running out of money. Of course, you also have the credit risk of the investor (insurer).

but what the investors are betting on isn't so much that people will die early (after all, they are going to die when they are going to die), but that their actuaries are more accurate than the actuaries of the pension fund.

ninky_2

not a new thing...just a widening of those who might get involved.

ILW

Surely it is just simple hedging, don't think are are betting on known individuals.

Loads make money out of death by providing pretty useful services.

ninky_2

ILW wrote: »

Surely it is just simple hedging, don't think are are betting on known individuals.

Loads make money out of death by providing pretty useful services.

no - we tend to do this ourselves when we take out the annuity / life insurance for ourselves or nearest and dearest.

purch

why bonkers?

Creating a Derivative product, where no doubt those trading in it will have little or no knowledge of the contents, and therefore the potential risks.

Sounds great on paper, until it all goes pear shaped.

ninky_2

death is so 21st century. i predict it will be outdated by next century.

Kennyboy66

What would be interesting in these markets is how much is actually used for genuine hedging and how much is for "gambling".

How long before there is a derivative for 'longevity cubed'