Making Life Markets Safe
Getting them up to fiduciary standards.
December 28, 2011
Last post, I described broadly the types and nature of securities in the longevity and life markets. In this blog, I will explain some of the important issues for the market and steps being taken by regulators, service providers and investors to aid in its development.
Key to the development of the longevity and life markets as a mainstream asset class is increased pricing transparency and regulation. Another important challenge is educating an uninformed investor as to the uses and strategies available in the realm of longevity structures.
By identifying and understanding the key determinants of asset value derived from a mark-to-model basis, managers have the confidence that market prices are a reasonable representation of security value. Increasingly longevity risk managers are improving their valuation methods and pricing uniformity. Underpinning the future growth of investment in the life markets as a stable, low-correlated investment opportunity is the future emergence of a uniform and transparent valuation methodology. Those asset advisors and managers that exhibit a fiduciary standard to investors aligned with the implicit fiduciary duty held by investors can offer a crucial source of asset knowledge and expertise based on the principles of transparency, consistency, and investor protection.
Greater state regulation is reinforcing the valuable utility presented by life markets to the individual. Further, growing federal recognition of the consumer utility of the secondary market, as illustrated by the Senate Bills of Oregon, Maine and Washington State, will also augment investor acceptance. Greater oversight of investment product creation by regulators will ensure that investors are aware of the relevant risks involved in longevity-linked instruments.
Longevity-linked instruments could have a profound effect on a broad range of economic factors. They may help advance annuity and pension programs in certain developing economies as well as reduce the potential for significant funding problems in the developed world. Without these tools taxpayers may be forced to bail out pensioners of bankrupt pensions and annuities. As there is currently insufficient reinsurance to deal with global longevity risk exposure, it is likely a robust market will evolve.