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The Life & Longevity Markets Association, comprising a group of insurers and banks, may succeed in creating a market for products that pass on the risk of people living into old age, Moody’s Investors Service said.

The group, founded last week by Axa SA, Deutsche Bank AG, JPMorgan Chase & Co., Legal & General Group Plc, Pension Corp., Prudential Plc, Royal Bank of Scotland Group Plc and Swiss Reinsurance Co., aims to create a secondary market in so-called longevity swaps and other derivatives whose values are tied to life expectancy.

“The variety of players involved in this new project enhances the chances of the association’s success when compared with previous initiatives,” Moody’s analyst Benjamin Serra said in an e-mailed statement today. Passing risks onto capital markets is “a plausible alternative to reinsurance,” he wrote.

Longevity swaps help protect insurance companies that provide annuities from higher payouts when people live longer than expected. Until now, such protection has almost exclusively been provided by the insurance and reinsurance markets, and the cover has been “insufficient,” Moody’s said.

Total pension liabilities exceed $19 trillion in the U.S. and $3 trillion in the U.K., Moody’s said, citing estimates by International Financial Services London.

“Given the duration of these liabilities, an increase of one year in longevity from current expectations could cause a 3 percent increase in liabilities, translating into a financial risk of around $600 billion in the U.S. and $90 billion in the U.K.,” Moody’s said. “Although the risk may be less significant in other countries, it is set to increase everywhere.”

The market in longevity risk may develop slowly as investors get used to the new products, Moody’s said.

“It will take time before investors become as confident in longevity risk as they are with catastrophe risk, for example,” Moody’s said. “Longevity risk is a very long duration risk, and there is no consensus on longevity models, especially beyond a medium-term horizon.”


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