Investors may soon be able to bet on life expectancies as pension funds search for ways to reduce "longevity risk"
Perhaps Wall Street has simply resigned itself to not caring what the public thinks. It is working to develop a new product sure to anger its critics: death derivatives. They sound just like what they are: investors would essentially bet that people will die sooner than later. This idea certainly sounds morbid at best and morally repugnant at worst. Essentially, those investors would profit from untimely death. Is it wrong for banks to create such products?
What's a Death Derivative?
First, a little more explanation is warranted here. The investor side of the bet has already been described. On the other side of the transaction would be pension funds that worry their clients are going to live longer than anticipated and consequently collect more payments than their accrued balance would provide for. If the people in question die quickly, then investors get paid. If people live longer, then the pension funds are covered. Think of death derivatives as a way for pension funds to hedge against their clients living a very long time.
I actually had an idea similar to this, but broader, more involved, and with greater profit potential, about six years ago when I was working in finance.* I didn't pursue it, however, because I wasn't sure the market was ripe yet and thought public outrage would be significant. Apparently, Wall Street must believe the time is right and is prepared to endure any outrage. Oliver Suess, Carolyn Bandel and Kevin Crowley at Bloomberg report that this new market is forming. Its size could be enormous: $23 trillion of assets are in pension funds. The trouble, however, is finding investors to take on this risk.