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Reduced returns and longevity risk are making it challenging for employers to offer defined benefit pensions. In countries with large defined benefit pension plan sectors, sponsors are transferring these obligations, and the associated investment and longevity risk, to life (re)insurers via buy-outs, buy-ins, and longevity swaps. Nevertheless, to date, there has been no successful longevity bond issuance, although there have been several false starts. This contrasts with the active market for catastrophe bonds that transfer risk associated with catastrophic events from (re)insurers to capital markets. This paper reviews catastrophe bond and other insurance risk transfer market developments, to identify the factors and design features that have resulted in success and failure. Conclusions are informed by an extensive literature review and quantitative survey, plus discussions with market participants including public policy makers. We conclude with suggestions for product design features and public policies that might kick start vibrant longevity bond markets.
Risk transfer, financial markets, insurance markets
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The views expressed herein are those of the author. All findings, interpretations, and conclusions of this paper represent the views of the author and not those of the Wharton School or the Pension Research Council. © 2020 Pension Research Council of the Wharton School of the University of Pennsylvania. All rights reserved.
Date Posted: 23 July 2020