You can bet on people dying: Liam Pleven and Ian McDonald in the WSJ have a good overview of how life-insurance companies are increasingly turning to the capital markets to hedge the risks they bear of insured individuals dying too soon. But can you bet on people living? The power team of Gillian Tett and Joanna Chung in the FT has a long and fascinating article about the other side of the coin: bonds issued by pension companies to hedge the risks of annuity holders, say, living too long.
The big problem is that at the moment all these instruments are largely targeted at sophisticated hedge funds, who want such large expected returns that issuance simply doesn’t make sense for the life insurers and the pension companies. In fact, a spate of mergers between pension companies and life insurers makes much more sense, since then the risks tend to cancel each other out. But such mergers aren’t easy: life insurers make their money by being constructive on mortality, while pension companies take the opposite view.
All the same, I’ve long been surprised at how unpopular annuities are. Pension plans usually wind up giving a recently-retired person a lump sum, and it would seem to make all the sense in the world to simply convert that lump sum into a guaranteed payment for life. But relatively few people do that, and so they run the risk of outliving their money. Maybe what’s needed is a combination annuity and health insurance product, which guarantees not only an income but also to pay all those dreadful medical expenses which can arise at the end of life. But there are precious few companies with the breadth of expertise to offer such a thing. Cue further insurance-industry consolidation!