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Making longevity risk an asset class

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A Bermudian-based insurtech company will soon release the first digital marketplace for trading longevity risk in index-based format.

Longitude Exchange said the platform will connect hedgers and investors on a web-based ecosystem that is purpose-built for longevity risk, which will bring transactional efficiency and enhanced liquidity to a market with growing demand for capital.

Avery Michaelson, a co-founder and CEO of Longitude Exchange, said: “Globally, pensions and insurers hold an enormous amount of longevity risk from retirement obligations.

“Longitude Exchange will connect them with a broad range of institutional investors who seek uncorrelated risk premia in insurance-linked securities.

“We’re turning longevity risk into an asset class.”

The organisation said longevity risk causes earnings volatility and high capital charges for pensions and insurers managing retirement liabilities. These can be alleviated through risk hedging, but cost and complexity have limited innovation in this market to date.

Set against this, the insurtech company said, the magnitude of longevity risk globally dwarfs the capacity of traditional providers, such as life reinsurers, to absorb all the anticipated risk transfer — capital markets investors must get involved.

Mr Michaelson said: “This market lacks a marketplace. Presently, transactions are brokered in an opaque process that has limited capital markets participation.

“Accessing risk-taking capacity from a broader set of institutional investors is the best way to fulfil the longevity risk market’s potential. Longitude Exchange is this marketplace.”

By providing a marketplace, Longitude Exchange said, it will drive down frictional costs and timelines through standardisation, while also providing price transparency and presenting an option for secondary liquidity — all of which will lead to more transaction volume and are precursors for broader capital markets involvement.

David Schrager, the company’s CFO and a co-founder, added: “By using Longitude Exchange, longevity risk hedgers can efficiently manage their longevity risk and capital charges.

“Our platform provides hedgers with tools to analyse, structure and place their longevity risk hedges at a price that’s typically lower than other forms of capital. Our goal is to provide hedgers of longevity risk with greater capacity, faster execution and better pricing.”

Longitude Exchange said it intends to function as a central counterparty for transactions, bringing enhanced credit support to the large, long-duration transactions it supports.

The platform will handle transaction structuring, trade documentation, structural set-up, primary issuance, managing collateral and providing continuing valuations — with the aim of greatly reducing transaction costs and timelines.

Diederick Venekamp, CTO and a co-founder of Longitude Exchange, said: “The technology we offer, for free, through the platform is capable of analysing the risk and capital aspects of index-based longevity risk transactions, which will streamline the process of transacting longevity risk for both sides of the trade.

“Longitude Exchange will provide unprecedented access to the longevity risk market through an easy-to-use digital interface and standardised transaction formats.”

The company said its founding team has extensive experience in the longevity risk and insurance markets and has been collaborating closely for years.

Mr Michaelson was formerly the head of longevity at Société Générale, where he was part of the team leading some of the first index-based longevity hedges; subsequently he founded US-based Longitude Solutions LLC as a transaction-oriented adviser in the longevity market where he led the 2017 hedging transaction between NN Life and Hannover Re.

It was working on that transaction that Mr Michaelson and Mr Schrager first collaborated, as the latter was the director of pricing and hedging at NN Life.

The company said Mr Schrager has extensive experience structuring, risk managing and trading derivatives and re/insurance contracts during his career at ING Group and NN Life and holds a PhD in economics.

In 2018, he joined forces with Mr Michaelson as a senior partner at Longitude Solutions, as well as forming a separate financial and management consultancy, named Adjacent.

In his work at Adjacent, the company said, Mr Schrager began collaborating with Mr Venekamp, who is the managing quantitative consultant and a founder of Dutch-based VB Risk Advisory, a consultancy firm consisting of a select group of experienced quantitative advisers with expertise in actuarial science and technology development.

Together they have advised European insurers and banks on a range of financial and risk management projects.

Longitude Exchange was formed through a partnership between Longitude Solutions and VB Risk Advisory.

Longitude Exchange said it will address the longevity risk hedging needs of pensions, insurers and reinsurers on a global basis, with an initial focus on North American and European markets.

It invites rated and unrated institutional investors to participate on its platform as risk takers, using customised longevity derivative contracts and collateral mechanisms to transfer risk and ensure payment obligations are met.

Further, the exchange sees itself as a platform for other service providers including mortality data providers, risk-modelling firms, and reinsurance brokers and consultants.

Mr Michaelson said the company is now demonstrating the platform with potential users on a select basis while it finalises some technology development.

Longitude Exchange said it invites all interested and qualified participants to join it in building the longevity risk market.

Direct queries to avery@longitude.exchange or david@longitude.exchange.

Avery Michaelson, co-founder and CEO of Longitude Exchange (Photograph supplied)
David Schrager, co-founder and CFO of Longitude Exchange (Photograph supplied)
Diederick Venekamp, co-founder and CTO of Longitude Exchange (Photograph supplied)

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Published March 03, 2022 at 7:58 am (Updated March 03, 2022 at 7:40 am)

Making longevity risk an asset class

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