Longevity risk
The risk that pension or annuity beneficiaries live longer than expected, one of the largest exposures in the world and the only one that resists securitization.
Longevity risk is the risk, for a pension fund or a life insurer, that its beneficiaries live longer than expected, which drives up the annuities and pensions it has to pay. Global exposure is estimated at between fifteen and twenty-five trillion dollars, among the largest in the world, and yet it is the only one that resists securitization. It turns the logic of insurance around, since the loss comes from a happy event, a life that runs longer. And it shows up as a slow trend that never settles, rather than as a dated claim. Its market runs one way, because no investor gains from survival. Its most dangerous part, the trend drift driven by medical progress, is also the hardest to model. Its natural home is still the reinsurer's balance sheet, where it offsets against mortality risk. Its systemic share has no ultimate bearer but the state.
Textbook case: if a medical advance suddenly adds several years of life expectancy to an entire population, a pension fund sees its commitments swell simultaneously, without any market investor having agreed to bear this correlated risk.
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