Trend risk
The risk that a systematic, unforeseen improvement in longevity hits all annuitants at once. Non-diversifiable, it is the demographic equivalent of catastrophe.
In November 2004, the EIB and BNP Paribas offered a 540 million pound longevity bond, indexed on the survival of men aged 65 in England and Wales. For lack of buyers, it was withdrawn. Two risks often get conflated. Level risk means being wrong about the average life expectancy of a generation; it is diversifiable and observation corrects it. Trend risk is the risk of a systematic and unforeseen improvement in longevity, such as a therapeutic advance that suddenly lengthens every life in a cohort. That one cannot be diversified, because it strikes all annuitants at once. It is the accumulation risk specific to longevity, the demographic equivalent of natural catastrophe, which is why insurers try to transfer it to reinsurance or capital markets. In an annuity book, it is the one that weighs most.
On a death benefit, an insured who lives longer pays more premiums, and the error works for the insurer. On an annuity, the same error works against it.
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