Deutsche Bank launches longevity index

Deutsche Bank it has launched a new population-based longevity product to help insurance companies and pension funds hedge their longevity risk exposure.

The product known as Longevity Experience Options (LEO) is designed to provide a standardised approach in the industry and offer an alternative solution for risk holders to transact with the sellers of protection.

LEO will allow insurance companies, pensions and investors to transfer risk based on standardised terms and documentation with transparent calculations based on readily available public data.

“There is a growing awareness amongst longevity risk holders of the benefits of hedging their longevity risk, however many of the bespoke solutions currently available can be costly and time consuming,” said Paul Puleo, head of the Pensions and Insurance Risk Markets group at Deutsche Bank.

“While we expect the bespoke market will continue to grow, we believe that the next step in development of this market is to make longevity risk management available to a broader range of market participants. Our standardised product will make this asset class more accessible, supplement existing risk management tools, and will help create more liquidity, better pricing and a more robust market in general.”

The index incorporates survival rates that are derived from the publically available population data published by the relevant national statistics agency. The tradable product will reference a specified five-year age cohort defined by age and gender, for example, males aged between 60-64 in England & Wales would make up one of these cohorts. The advantage of trading in 5-year cohorts is that insurance companies and pensions can customise the product to their liabilities.

Initially trading will be focused on indices for the national populations of England & Wales and of the Netherlands. Deutsche Bank may add additional countries in the future as well as adjusting the number of cohorts depending on the availability of data, sufficient liquidity and client interest.