System and method for managing hedging of longevity risk

Abstract

A computer implemented method and system are provided for implementing a longevity bond management system for managing hedging of longevity of beneficiaries. The method may include issuing, through a special purpose vehicle, using computer processing components, a longevity bond having returns following a longevity index defined for a reference population of a pre-selected cohort of beneficiaries. The method may additionally include receiving from investors a payment amount for investment in the longevity bond, investing the payment amount in a collateral pool held by a custodian, and receiving cash flows from the investment in the collateral pool. The method may further include entering into a swap to exchange the cash flows from the investment for an amount equal to the difference between an actual and best-estimate longevity index amount and calculating, using computer processing components, based on the longevity index, a periodic payment to the investors based on the longevity performance of the pre-selected cohort of beneficiaries, such that the periodic payment increases when longevity exceeds expectations and decreases when longevity falls short of expectations.

Description

TECHNICAL FIELD[0001]Embodiments of the invention are related generally to systems and methods for managing longevity risk and in particular to systems and methods for offering an investment vehicle for hedging longevity risk and providing economic capital relief.BACKGROUND OF THE INVENTION[0002]Increasing human life spans have operated to create new challenges for the elderly and for existing infrastructures that support the elderly population. Members of the aging population are faced with the possibility of outliving their financial resources and therefore seek mechanisms that will guarantee financial independence. Accordingly, financial instruments have become available for providing long term financial security.[0003]Corporate pensions and insurance company annuities, which are frequently utilized by the elderly contain significant interest rate, inflation, and longevity risks for the providers of such products including life insurers and pension plans. Under favorable market c...

AI Technical Summary

Benefits of technology

The patent describes a computer-implemented method for managing a longevity bond management system. The system uses a computer processing component to calculate a longevity index for a reference population of beneficiaries and issues a longevity bond with returns based on the index. The bond is then purchased by investors and the cash flows from the purchase are invested in a collateral pool. The system also includes a swap execution engine to exchange the cash flows for the difference between the actual and best-estimate longevity index amount. The system calculates a periodic payment to the investors based on the longevity performance of the reference population and forwards it to the investor. The technical effect of the invention is to provide a system for managing longevity bonds that can hedge the risks of longevity for beneficiaries and provide a regular payment based on their longevity performance.

Problems solved by technology

Corporate pensions and insurance company annuities, which are frequently utilized by the elderly contain significant interest rate, inflation, and longevity risks for the providers of such products including life insurers and pension plans.

However, as market conditions deteriorate and poor equity returns prevail, pension plan providers are impacted by the longevity improvements that have occurred over time.

Furthermore, life insurers providing annuities face risks due to unanticipated changes in mortality rates.

However, a number of issues arise with the trading of mortality linked securities.

Such issues may be related to the liquidity, basis risk, and credit risk.

As stated above, pension funds and annuity providers face growing risks due to the increasing life spans as they may have guaranteed fixed or variable payments for a life span that has become unexpectedly lengthy.

Thus, the longevity risk created by increasing life spans in conjunction with interest rate risk has caused problems for the annuity market.

As annuity markets continue to grow, the risks and consequences of underestimating mortality improvements also continue to grow.

Furthermore, in some instances, for example when a bond is issued by a government or government sponsored entity, the yield on the bond is too low to attract investors.

Thus, investors have been reluctant to accept currently existing structures for issuing longevity bonds.

The combination of the low yield and an imperfect demographic structure failing to adequately define a cohort for predictive accuracy have been deficiencies of previously attempted longevity bond systems.

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