Longevity Risk and the Stability of Retirement
Systems: The Chilean Longevity Bond Case

Abstract

Longevity risk is systemic in nature, threatening the stability of national retirement systems. Distinct from the general and prolonged rise in the duration of life over the last half century, longevity risk lies in the unexpected part of the increase in life expectancy. Over the past years, rapid progress in longevity has regularly trumped official forecasts. This is a potential source of insolvency for all economic entities managing defined-benefit retirements, public and private sector alike. Governments are currently dealing with this risk through regulation, by imposing larger, and more risk-based, capital requirements. At a country level, this is akin to a self-insurance strategy relying on the constitution of savings. The alternative would be to insure. One insurance strategy is to source insurance from global capital markets. The potential value of this proposition resides in the very deep risk-taking capacity of markets and in optimal risk sharing with institutional investors. This article studies the case of a country, Chile, confronted with the possibility of buying insurance from markets in the form of a longevity bond.