Death Derivatives
Jul. 10th, 2008 01:45 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
peterbirksIt's quite touching to see that, shortly after the last credit derivatives fiasco, companies are queueing up to create the next one.
I refer to Swiss Re's announcement that it will be establishing a new pensions division.
Now, pensions are a hot topic. The idea was transferred from the idea dreamt up by Clive Cowdrey with Resolution, and closed life books. In those cases, a company bought up the closed life books of insurance companies and, in theory, ran them down to nothingness, paying off the customers and leaving themselves with a nice profit at the end.
Clearly there was an opportunity to do the same with pensions books, and in the past couple of years a number of companies have been competing for the business of operations that really have a very large pension fund operation compared with the size of their company's main business.
What Swiss Re is doing that is new is that it is offering to buy the mortality risk from the pension schemes. This "de-risks" the scheme for the pension fund, because the major concern of such funds is that people live too long. So, Swiss Re has come up with the ripping wheeze of buying this "risk", and then repackaging it and selling it on to hedge funds.
Well, you don't need to be an actuary to see where this is heading, do you? What starts off sounding like a good idea immediately raises the worrying prospect of moral hazard when selling annuities. How long before we get a similar situation with pensions as we have just had with houses? We will soon find ourselves in a situation where the person selling you the pension (be it part of a job scheme or a standalone product) will be working for a company that sees no risk in you living too long. The net result here is the inverse of the mortgage borrowing, but the effect will be the same. Applicants will be encouraged to say that they smoke, that they have heart conditions, that they are obese. Whole rafts of these pensions will then be sold through to the markets at totally the wrong price. Then a decade or so later, when 50% of the people who bought the policies should be dead, a solid 95% of them will still be alive. Then, and only then, do we find out how many of these products are in the market. And the next thing you know, another investment bank has collapsed.
++++++++++++++
And, in the mode of cheering 'em on from the rail, it's nice to see that the Camel and Miros have made it through to day three of the Main Event, with above-average chip stacks (unless Miros burnt all his chips in the last few hours of play on day 2(b)... I can't check chip counts at work, and in Miros-land it is, I fear, always a possibility). Is what Ben Grundy wrote about Gryko true? Is he really dealing at a casino in Luton? If the world weren't just so completely insane at the moment, I would dismiss this story out of hand, but there's been no mention of him in LV on any of the sites.
As Mr Purle (who appears to have achieved another get-out) said of his own run of 52 straight non-cashes. "Not sure what the moral of this story is, except to go skint".
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I refer to Swiss Re's announcement that it will be establishing a new pensions division.
Now, pensions are a hot topic. The idea was transferred from the idea dreamt up by Clive Cowdrey with Resolution, and closed life books. In those cases, a company bought up the closed life books of insurance companies and, in theory, ran them down to nothingness, paying off the customers and leaving themselves with a nice profit at the end.
Clearly there was an opportunity to do the same with pensions books, and in the past couple of years a number of companies have been competing for the business of operations that really have a very large pension fund operation compared with the size of their company's main business.
What Swiss Re is doing that is new is that it is offering to buy the mortality risk from the pension schemes. This "de-risks" the scheme for the pension fund, because the major concern of such funds is that people live too long. So, Swiss Re has come up with the ripping wheeze of buying this "risk", and then repackaging it and selling it on to hedge funds.
Well, you don't need to be an actuary to see where this is heading, do you? What starts off sounding like a good idea immediately raises the worrying prospect of moral hazard when selling annuities. How long before we get a similar situation with pensions as we have just had with houses? We will soon find ourselves in a situation where the person selling you the pension (be it part of a job scheme or a standalone product) will be working for a company that sees no risk in you living too long. The net result here is the inverse of the mortgage borrowing, but the effect will be the same. Applicants will be encouraged to say that they smoke, that they have heart conditions, that they are obese. Whole rafts of these pensions will then be sold through to the markets at totally the wrong price. Then a decade or so later, when 50% of the people who bought the policies should be dead, a solid 95% of them will still be alive. Then, and only then, do we find out how many of these products are in the market. And the next thing you know, another investment bank has collapsed.
++++++++++++++
And, in the mode of cheering 'em on from the rail, it's nice to see that the Camel and Miros have made it through to day three of the Main Event, with above-average chip stacks (unless Miros burnt all his chips in the last few hours of play on day 2(b)... I can't check chip counts at work, and in Miros-land it is, I fear, always a possibility). Is what Ben Grundy wrote about Gryko true? Is he really dealing at a casino in Luton? If the world weren't just so completely insane at the moment, I would dismiss this story out of hand, but there's been no mention of him in LV on any of the sites.
As Mr Purle (who appears to have achieved another get-out) said of his own run of 52 straight non-cashes. "Not sure what the moral of this story is, except to go skint".
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no subject
Date: 2008-07-11 03:23 pm (UTC)Link? God damn you, I want a link!
Hearing that DY serves soup in a down and outs kitchen would be the icing on the cake.
Miros lap dancing in a gay club would merely be a sorbet to cleanse the pallet.
no subject
Date: 2008-07-12 09:30 am (UTC)Wow, these are going to be some exciting posts.
From Mr Young
Date: 2008-07-12 09:53 am (UTC)The reference to Gryko dealing at Luton on Ben Grundy's blog is a joke. Miros has made it through to day four of the WSOP with a decent stack of chips. I'm doing fine thanks.
DY
Re: From Mr Young
Date: 2008-07-12 09:54 am (UTC)PJ
Re: From Mr Young
Date: 2008-07-12 10:03 am (UTC)Okay, now we are up to Fannie Mae and Freddie Mac.
Anyway, RG pisses everything he earns so could do with a job. DY will be in need of a soup kitchen in the future. Miros probably does frequent lap dancing clubs, in northern Sweden, with reindeer herders.
Re: From Mr Young
Date: 2008-07-12 12:47 pm (UTC)Just add me as a friend and use autlogin. This will take you straight to your 'home' page when you type www.livejournal.com. At the top will be a link to "Friends' posts". Click on that and my posts will be there. Then just click on 'reply' and it should be automatic.
I'm in Worcester this weekend and I haven't got round to reading the details re Freddie Mac and Fannie Mae. They are horribly complex institutions anyway -- listed, but quasi-governmental (they were part of the New Deal originall, weren't they?) They won't be allowed to fail, but it makes the position of the next president v difficult.
Just as big spending by the US under Reagan brought down the Soviet Union, so the lack of cash is likely to do more than anything else to end US involvement in Iraq. The Iranian conflict just ain't gonna hapen and Israel is going to be left begging for dollars that just aren't there. Crude is hovering around $145 and I am still awating that final spike to $160. $200? Pshaw.
PJ
Re: From Mr Young
Date: 2008-07-12 02:23 pm (UTC)A final spike afore what, $10 a barrel forever?
Don't worry, another reader of your blog thinks we'll all be flying around in nuclear powered jetpacs. It's all sorted.