Securitizing Longevity Risk: Are ‘Death Bonds’ a Good Investment?

But the big banks—including Goldman Sachs, JPMorgan Chase, and Deustsche Bank—are coming to the rescue by packaging that longevity risk and selling it to investors.

They’re counting on investors being interested in gambling on your death.

The pension funds want to insure themselves against their longevity risk, so the banks are packaging that risk into longevity bonds, or in the pejorative, “death bonds,” and selling them to investors eager take on some of that risk. It’s a practice akin to the pre-financial crisis practice of packaging subprime mortgages into mortgage backed securities and selling them to investors.

Investors profit by taking “premiums,” a portion of the pension funds’ assets. In exchange, investors promise to make good on any losses experienced by pension funds if life expectancies deviate higher than their expected levels.

There are significant challenges for purveyors of longevity bonds. The primary challenge is that payout on the bet only happens when someone dies, and that can take 20 years or longer. Investors are looking for short-term performance, and the uncertainty of longevity bonds can keep them away. There’s also the counterparty risk inherent in a contract that can last 20 years or more. Pension funds must be able count on investors, and the banks, to remain solvent over the entire life of the contract.

The final challenge for death bonds is public perception. Although these death bonds, or “death derivatives,” fill a niche needed on Wall Street, they turn many stomachs on Main Street.

The Concerns Over Death Bonds

The stark reality of death bonds: Investors profit when insureds die. The drama of death bonds has pushed