Longevity Derivatives

Definition of 'Longevity Derivatives'


A class of securities that provides a hedge against parties that are exposed to longevity risks through their businesses, such as pension plan managers and insurers. These types of derivatives are designed to have increasingly high payouts as a selected population group lives longer than was originally expected or calculated.

The first (and still most prevalent) form of longevity derivatives is the longevity bond (also known as survivor bond), which pays a coupon based on the "survivorship" of a stated population group. As the mortality rate of the stated population group rises, coupon payments drop until eventually reaching zero. The longevity derivatives market has since expanded to include forward contracts, options and swaps.

Investopedia explains 'Longevity Derivatives'


Speculators choose to acquire longevity risk from companies for several reasons. Many speculators are attracted by the fact that longevity risk has shown very low correlations with other types of investing risks, such as market risk or currency risk. Many institutional investors are attracted to anything that doesn't move lockstep with equity or debt market returns.

Because they are a new class of product (the first longevity bonds were sold in the late 1990s), there are still issues being worked out as to the best way to package longevity derivatives to investors and insurer groups, how to best capture sample populations and how to use leverage most effectively.



comments powered by Disqus
Hot Definitions
  1. Genuine Progress Indicator - GPI

    A metric used to measure the economic growth of a country. It is often considered as a replacement to the more well known gross domestic product (GDP) economic indicator. The GPI indicator takes everything the GDP uses into account, but also adds other figures that represent the cost of the negative effects related to economic activity (such as the cost of crime, cost of ozone depletion and cost of resource depletion, among others).
  2. Accelerated Share Repurchase - ASR

    A specific method by which corporations can repurchase outstanding shares of their stock. The accelerated share repurchase (ASR) is usually accomplished by the corporation purchasing shares of its stock from an investment bank. The investment bank borrows the shares from clients or share lenders and sells them to the company.
  3. Microeconomic Pricing Model

    A model of the way prices are set within a market for a given good. According to this model, prices are set based on the balance of supply and demand in the market. In general, profit incentives are said to resemble an "invisible hand" that guides competing participants to an equilibrium price. The demand curve in this model is determined by consumers attempting to maximize their utility, given their budget.
  4. Centralized Market

    A financial market structure that consists of having all orders routed to one central exchange with no other competing market. The quoted prices of the various securities listed on the exchange represent the only price that is available to investors seeking to buy or sell the specific asset.
  5. Balanced Investment Strategy

    A portfolio allocation and management method aimed at balancing risk and return. Such portfolios are generally divided equally between equities and fixed-income securities.
  6. Negative Carry

    A situation in which the cost of holding a security exceeds the yield earned. A negative carry situation is typically undesirable because it means the investor is losing money. An investor might, however, achieve a positive after-tax yield on a negative carry trade if the investment comes with tax advantages, as might be the case with a bond whose interest payments were nontaxable.
Trading Center