Mega Trend 2: Longevity becomes a tradeable commodity

I am sure that like me, many of you are looking forward to the delayed Euro 2020 football championships – that’s soccer for our American friends -which take place across Europe this June and July.


And if you’re a betting person, the tournament provides endless opportunities to profit from your footballing expertise (or more likely, line the pockets of the bookmakers). As well as more traditional markets like tournament winners (favourites France) or top scorer (favourite Harry Kane), the spread betting markets allow you to apply your nous to such esoteric matters as the total number of throw-ins (sold at 2,130 and bought at 2,170 at time of writing) and “Total Goal Yardage” (sold at 1,710 and bought at 1,750). 

For those not familiar with spread betting, here’s an example of how it works. If I were to buy throw-ins today at £1 per point, and at the end of the tournament the total number of throw-ins was in fact 2,270 (or 100 more than the buy price), then I would win £100. However, if I were to have sold at 2,130, I would lose £140. The gap between the buy and sell price (or the “spread”) provides the bookmaker’s margin. If during the tournament, the throw-in action was getting a bit too hot for me, I could also close out my position based on the latest buy or sell price. This latest price will reflect the number of throw-ins won to date, as well as any emerging trends in throw-in frequency as assessed by other market participants. 

If I (and in fact Hedge funds!) can bet on whether the total distance of the goals scored in Euro 2020 will exceed a mile, why can’t I bet on whether people are going to live past 90? I’m not talking about individuals here, but rather a large group of lives. What if I could bet on the average lifespan of a current 65-year-old? If it were possible to take a position on this metric, this would provide an excellent hedge for pension plans to help meet their commitments to their members.

What’s stopping this market from developing?

Whilst, pandemic permitting, Euro 2020 will be done and dusted by July, we won’t know the average lifespan of a current 65-year-old for 50 years or so, when the last of that generation will have passed away. In footballing terms, this would be more like betting on how many league titles Tottenham Hotspur will win by 20701. To make this market work, we need parties interested in taking up both sides of the bet. And unfortunately, there aren’t many organisations out there looking for a 50-year hedge against lower than expected longevity improvements. What’s needed is for the other side of the hedge to be seen not as a long-term bet but as a short-term source of speculation, traded on a day-to-day basis.

My vision for the next ten years is that a liquid longevity trading market will emerge, driven by the sheer level of demand from sponsors to remove legacy defined benefit pension plan risk from their balance sheets.2 Just like the financial markets currently allow pension plans to hedge their exposure to interest rate and inflation risk, holders of longevity risk will now have access to a natural hedge. On the other side of the trade, capital market players will have an additional trading class, providing diversification with all the other assets they hold. Once this market has developed, it will also help those of us in defined contribution pensions to manage our own longevity risk, perhaps in combination with pooling mechanisms designed to help manage our individual lifespan risk3.

Can you imagine a world where the daily change in life expectancy is quoted on the radio alongside the FTSE100 and the $:Euro exchange rate? COVID is encouraging bright modelling minds to consider a career in epidemiology.  The awareness that the capital markets are assessing their every move would certainly focus politicians’ minds in relation to improving public health.

There will of course be technical challenges to address before we can make this work, but we at Club Vita look forward to playing our part in nurturing this important stepping-stone towards better longevity risk management.

What do you think?

Will the increasing demand for longevity protection from pension plans encourage the industry to overcome the barriers of creating a liquid longevity trading market? 


1 Spoiler: None.

2 In their 2014 paper Strategy for Increasing the Global Capacity for Longevity Risk Transfer, Michaelson and Mulholland estimated that at the end of 2013 the combined capital of the entire global insurance and reinsurance industries was barely 80% of the global potential for longevity risk. For all pension plans to offload their longevity risk to the insurance industry (where risk capital must be held), a lot more capital is going to be needed! https://longitudesolutions.com...

3 See https://www.theactuary.com/2021/04/30/staying-course-how-pooled-annuity-funds-are-proving-attractive-alternative

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