Betting on life expectancy

Stephen Beard Nov 23, 2006


BOB MOON: They say nothing is certain but death and taxes, but it turns out there is some uncertainty when it comes to death. No one knows when it’s going to happen and that makes it possible to develop a whole new market in something called “death derivatives.” It amounts to betting on changes in the average human lifespan. Pension firms and insurance companies are expected to be big players in this new trade. Marketplace’s Stephen Beard reports.

STEPHEN BEARD: Derivatives can be complicated, but broadly they are bets that are turned into tradable securities.

One investor says ‘I will pay $100 if the Dow hits 13,000 within the next six months.’ He then sells that promise in the futures market.

Death derivatives would be roughly the same, except the investor would be betting on future mortality rates.

Pension companies would buy those derivatives that yield a profit if average life expectancy increased. That would cover the extra cost of paying out more pensions. It’s a form of insurance says Andrew Hilton of the CSFI think-tank.

ANDREW HILTON: Pension funds, which are making promises to pay a final salary pension, don’t know how much they’re really going to have to shell out. So they would like to hedge that risk. They would like to buy some sort of security that would give them protection.

So if the average lifespan increases and pension companies have to pay out more, they won’t suffer financially because their death derivatives will be more valuable.

The new securities are likely to be launched next year. Some analysts say the new market could soon be worth trillions of dollars, but New York may lose out to London because of America’s tougher regulations, says analyst Justin Urquart Stewart.

JUSTIN URQUART STEWART: It is for New York to win and New York’s regulators to try to make sure they wish to participate in this business. It’s going to be huge, but unless New York does get its act together, then I’m afraid it will lose out again.

This week the U.S. Treasury Secretary warned that American regulations could severely damage the health of American markets. The death derivative could be another nail in the coffin.

In London, this is Stephen Beard for Marketplace.

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