Posts Tagged ‘Deutsche Bank’

Longevity forever

February 23, 2010

» Long live longevity

Back in the heady days of 2006, some experts were predicting that London would become the centre of a huge new global market in trading the “longevity risk” faced by pension funds. It could eventually outstrip the huge credit derivatives market, they said.

Investment banks got very excited about it. But nothing much happened. In recent months, however, there have been a number of big longevity insurance deals that could change things.

Yesterday, BMW’s UK arm revealed it had bought insurance from Deutsche Bank’s Abbey Life that will protect it against the risk that the 60,000 members of its pension scheme live longer than expected.

Hmmmmm, I foresee a financial product called a longevity swap.

This is how financial engineering starts: a specific requirement which gets resold and resold and resold. What is more depressing is that most people will think of these securities as “complex financial engineering”, an almost wilful misunderstanding of them. Yet just today I was watching a very nice advertisement hosted by that very nice Michael Parkinson about some very nice life assurance product (I was ill, if anyone was wondering what I was doing) where people paid a very nice regular amount per month and, after two years of paying, were assured a very nice life assurance payment on their death.

Insurance is all about risk, and so are the financial markets – measuring it, controlling it, charging for it. And generally, for a purpose (admittedly a purpose which can later by absorbed by the larger world of speculation). Financial products such as derivatives and swaps did not come into life for no apparent reason. It’s a point I always feel is underplayed: these fancy financial products are useful to someone.

Advertisements