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Feel Like Betting On Life Expectancy? There's A Derivative For That
Think CDS were the scourge of humanity, think again. As Pension360 reports, several Wall Street firms are selling securities backed by longevity risk - the risk that retirees receiving benefits will live longer than expected (and thus incur a higher cost on their retirement plan). As Ted Ballantine notes, 'no one ever said Wall Street wasn't creative'; but one wonders just how the banks are mitigating this risk...
More from Institutional Investor:
Sovereign wealth funds, educational endowments and ultrahigh-net-worth individuals are the target investors for longevity derivatives, which package the risk that retirees drawing annuities will outlive actuarial expectations.
The roots of this nascent market date back to 2006, when small monoline insurance companies such as U.K.-based Lucida (purchased by Legal & General in June 2013) and Paternoster (bought by Goldman Sachs Group in 2011) began taking longevity risk off European pension funds through bulk annuity buyouts.
These buyouts entail a company selling pension assets earmarked for all or some of its plan participants. The assets are converted to annuities that the sponsor can keep on its books or off-load to the insurer.
[…]
Banks build longevity derivatives products using risk models provided by firms like Newark, California–based Risk Management Solutions (RMS). They’ve closed a dozen such deals, but the customized structure can be tough for investors to grasp. Deutsche Bank is focused on creating a path into the capital markets, according to Paul Puleo, global head of pension and insurance risk markets in New York.
In December 2013, Deutsche created longevity experience options, or LEOs, a more standardized product tailored to capital markets participants. Longevity derivatives resemble the older catastrophe bond, or insurance-linked security (ILS), market, which packages insurance against natural disasters. A key difference between longevity insurance derivatives and cat bonds is that there are now a number of hedge funds dedicated to the ILS market.
Who buys these securities? It’s been mostly life insurers so far. But firms anticipate other interested parties will soon be buying up these instruments, as well. From Institutional Investor:
Although it’s been difficult for capital markets participants to compete with such natural buyers, long-term investors like sovereign wealth funds may find the portfolio diversification attractive. Ultrahigh-net-worth investors might also be interested, says Peter Nakada, Hoboken, New Jersey–based head of the life risks and capital markets units at RMS. These products can be viewed as a social good because they provide insurance for people who may not have enough cash in retirement, Nakada posits: A wealthy individual makes good money now by purchasing them; in the unlikely event that retirees exhaust their annuities, the monetary outlay can provide financial relief to the needy elderly.
The firms selling these instruments seem to realize the market is “immature” and it will take investors a while to warm up to them. But several industry sources told Institutional Investor they see longevity derivatives as a diversification tool and a good fit for portfolios of endowment funds and even high-worth individual investors.
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In other words, if you feel like betting on life-expectancy - because S&P futures is just so yesterday - longevity derivatives are for you...
Aren't you glad you bailed them out now?
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If the trade is working against you, you can always bribe a few politicians to start a war. Then again, McCain is naturally inclined to start wars.
Go short life expectancies given the criminal nature of our leaders.
eeeee bol aaaah
nah all they need is for the people to keep shoping at your regular supermarket it takes you out everything is mostly chemicals
Logan's run comes to mind. But I think that what will happen is the new rules on Medicare preventing readmission for the same condition will do the trick and keep the benefits in the war coffer.
My guess is that longevity risk becomes a non-issue in the next decade or two.
Population collapse is on its way...
http://www.planbeconomics.com/2014/09/limits-to-growth-was-right-new-res...
III. DEMOLITION BY DERIVATIVES; DISINTEGRATION OF THE DERIVATIVES MARKET; “DERIVATIVE DEATH STAR” IMPLOSION
I see global stability ahead
Article: “Wall Street firms are selling securities backed by longevity….
Just not sure if they, too, can believe that: All of them will NOT be wiped out during this process, as well.
Bet on!
I am.
Will The $1.5 QUADRILLION Derivatives Market Collapse In 2015?
Truthseeker2,
Maybe!
But I think it might go longer (2018???) because of shale in America, tar sands in Canada, and some China and Africa “credit money” growth.
But, when it starting failing, it's all over.
We will be facing something much worse than financial collapse.
We will be facing Societal Collapse, globally!
You millenarians really are tiring.
The world is never going to end. And you are always going to be average. Deal with it. There is no "second chance" lottery on the way.
Step #1: Pruchase some puts
Step #2: ISIL False flag in Manhattan
Step #3: Profit
NEVER become worth more dead than Alive !!!!
This is what I'm worth dead....
When we total the monetary value of the elements in our bodies and the value of the average person's skin, we arrive at a net worth of $4.50!
That's going by the simplest compounds......and even that is debatable. Another similar analysis comes in at $160
http://www.datagenetics.com/blog/april12011/
But you're actually worth quite a bit if priced by more complex parts...... kidneys, heart, lungs, corneas.... lots of ways to look at this. Certain hormones are worth thousands per microgram.
A different analysis puts the value at $46 million
http://www.well.com/~justpat/bodyparts.pdf
I once parted out a 1979 Trans Am for 3x what I could have sold the POS for. Same concept.
Killer actuary's ?
Removes the boredom from the job.
Net, net for USA .gov'ie.
When Goldman fixes the spread by incentivizing doctors to euthanize the over 65 crowd the SS admin will pay the Goldmanites a percentage of benefits not claimed.
So how do you incentivize the doctors? Own the insurance companies or underwriters and threaten not to pay because of.... whatever.
At this point... I'm betting on my kids looking after me, or putting me on an ice sheet as bear-bait.
"Be useful or become Soylent Green." seem the mentality for the coming NWO. So, that's what the Bankster meant by "Doing God's work"!
I have a deal with my kids.
When I'm not worth looking after, do something the equivalent of putting me on ice as bear bait.
They know I have no money, so that isn't a factor.
Hilarious
"Pater noster" is latin for "our father" (...who art in heaven...)
So they actually are doing God's work?
IS IS hit squads coming to a Florida retirement community near you. Think about it, you take down 100 retired Cook County union loafers you save the pension plan $300,000,000 in payouts.
That is the ONLY way the Cook Co. plan stays solvent
"one wonders just how the banks are mitigating this risk..."
its called ObamaCare
.....that was just too easy
Ebola would be cheaper, AND more effective.
Have to wonder why people with ebola are flown to US rather than ebola treatment being flown to patients in Africa.
A 40 cal hollow point in the head from DHS would be almost as cost effective as Ebola.
I suggest at least 2% physical gold. If you don't have savings that you can do a 2% calculation on...you weren't going to make it anyway.
Actually I'd suggest closer to 100% physical gold but you'd have to be nuts eh?
You can only carry so much.
A rule of thumb for the max.
Just relying on metal might be less than optimal, but having some has to be a decent plan.
I know this has been said a gazillion times, but maybe once more will make a small difference....
As well as any Ag or Au...
A month's rent/mortgage plus a month's groceries in cash...
3 months food/cleaning products/fuel for cooking/booze/candles for light.
Some form of self defence (varies by country)
Weather-proof clothing
Physical fitness.
One additional thing.
Hope for the best.
Things that make you go hummm... Bankers making money the faster we die
TONTINES. THIS IS TONTINES!
hahaha. this type of investmeent dates over 400 years old. and was made illegal at times. just like life insurance was once made illegal.
teslaberry:
+1000 for the tontine reference.
On a shorter than foreseen timeline, the survival rate for everyone will drop to 50/50.
Ooops !
http://www.youtube.com/watch?feature=player_detailpage&v=UNaQUlIa5_E
Thank you Ebola. If the SEC and the DOJ don't do anything, at least Mother Nature is willing to give it a shot.
ROFLMAO!
WHAT MUST BE UNDERSTOOD IS THAT THERE ARE TOO MANY ASS-LICKERS IN THE USA WHO HAVE BOLIXED UP OUR ENTIRE COUNTRY AND YOU MAY AS WELL SAY THE ENTIRE WORLD, THE WHOLE BALL OF WAX AND SHEBANG! WHY? WHO VOTED FOR THE RICH A$$HOLES WHO ARE MAKING ALL OF OUR LIVES TOTALLY MISERABLE AND TURNING OUR SOCIETY INTO A GLOBAL PLANTATION? CERTAINLY NOT YOURS TRULY, AND IF I HAD ANY SAY I WOULD LINE THESE PATHETIC JERK OFF ARTISTS AGAINST THE WALL AND GUN THEM DOWN WITH AN AK47!!!
Forget cremation.
When I die, I want that coffin.
"but one wonders just how the banks are mitigating this risk..." My guess is that the banks rip their customers off so bad that even in a worst case scenario, they can't lose. Perhaps they will hedge the risk with life insurance companies who are more profitable when the old people keep living. In any case, any firm who thinks they will come out positive by trading Longetivity Options with Goldman Sachs has lost their effing mind.
How are the banks hedging the risk? Pretty easy. They expect to go broke when they have to pay out and be bailed out by the taxpayer. In the meantime their employees, directors and shareholders will enjoy the premiums.
Insurance Linked Securites V 2.0.
This is prob one of the reasons why the SEC is trying to make big insurance companies have bank like capital standards.
Simple, if we all live too long and they lose the bet, we’ll still be around to bail them out.
What risk???
AIG is probably underwriting everybody again for fractions of pennies on the dollar of exposure.
“We just can’t see any way we would ever lose money on these contracts”.
In other words, "it's eons away on the Wall Street timeline, (where the horizon is 90 days and ten years = infinity), and I will have booked ten bonuses and retired in a villa in Saint Croix by the time these contracts settle, so, who gives a shit who pays for it?"
How 'bout just selling a collateralized moral hazard obligation? You know where, say Hank Paulson or Jeethner are obligated to breach and it only pays when they don't. Get Blythe on the line... we'll call them comoho... a sure bet. Death panels needed a broader prediction market anyway. Tell Sunstein his default opted-in organ donation plan has got a more reliable supply chain. Instead of Nudge, we'll call it Budge.
Just in time for Ebola.
How timely.
The Social Security Retirement System is basically a program of insurance against the risk of living longer than expected. Since average life spans have steadily increased since its inception, it is natural that periodic adjustments to entitlement and benefit levels are required. These adjustments should be made independently of deficit reducing measures in the general fund. The Social Security system needs to have more autonomy and be able to invest in securites other than government bonds.
"one wonders just how the banks are mitigating this risk..."
War.
It was just a matter of time.
When the underlying concerns the life of a person, then moral hazard includes the murder of that person. Probability of murder is increased by a) leverage (number of claims on the underlying) and b) lack of insurable interest (http://en.wikipedia.org/wiki/Insurable_interest).
This isn't some outlandish statement, it's a simple reminder of what already happened in history. High profile murders, encouraged by gambling on a third party lifespan, were instrumental in forcing the regulation of traditional insurance as we know it:
- the policy taker should have an insurable interest. I cannot take a policy on your life or property.
- it should not be possible to take out multiple policies against the same event, again to minimize moral hazard. I cannot take out 20 home insurance policies on the same house.
These sensible restrictions were forged from experience and greatly limit the number of bets (policies) that can be made.
Exotic Derivatives bypass these requirements, setting the sky as the limit for making bets, inflating moral hazard, and enabling the tail to wag the dog as the money moving in derivatives exceeds the value of the underlying.
This harmful pattern is just a repetition of the same pattern observed in other betting sectors from sports betting to stock options. This is why, as one example, bucket shops were banned: http://en.wikipedia.org/wiki/Bucket_shop_(stock_market) .
The stupidity in allowing this to happen is appalling. CDS allowed multiple parties to effectively open any number of positions on the very same underlying entity in which most parties had no insurable interest whatsoever. Predictably, parties such as GS deliberately pumped subprime so they could profit from betting on the collapse.
Hundreds of years of hard experience discarded. Unrestricted gambling on the lifespans of people, without said people even being aware of it, will create an incentive for murder.