Longevity Derivatives
Categories: Derivatives
The Union of Pachyderm Excremental Engineers of America hires you to run their pension plan. You have to invest contributions in a way that will pay for the retirement of all the union’s members (who, being elephant pooper-scoopers, are really looking forward to retirement).
One major risk: people will live too long. If you get a bunch union members living to be 125 years old, you might run out of money.
You need a way to hedge this risk of longevity. Enter: longevity derivatives. These contracts pay off based on survivorship in a certain population. It’s like an insurance policy in case a given population doesn’t die at the rate you expect. Almost the opposite of life insurance: "not enough death" insurance. Think: marketing Marlboros.