What is ‘survivor bond’
The survivor bond is a type of security whose future coupons are based on a percentage of the stated population group who are still alive on the future coupon payment. In other words, survivors from this group.
The payment of these coupons depends on the fraction of the group that survived to a certain age.
Breaking down the ‘survivor bond’
The basis behind the survivor bonds is the idea of longevity risk. Longevity risk applies to pension funds and insurance companies of life, which may have exposure to higher-than-expected payments due to the increase in life expectancy. These unplanned, higher payments may create a burden on the income of the company. The term longevity risk refers to the risk of losses incurred by unexpected reduction in mortality and corresponding increase in life expectancy. In simple terms, this means that people receiving benefits from a particular plan or benefit may live longer than expected.
These bonds, as part of risk management strategies, helps to mitigate the delays in payments. Risk management occurs as the Fund Manager analysis of potential losses and takes steps to reduce the impact on the income of the General Fund. The surviving bonds are used by annuity providers and pension plan managers to hedge aggregate longevity risk. With increasing mortality, and a group of survivors decrease over time, coupon payments in a Pension or insurance plan will decline until they eventually reach zero.
Increasing life expectancy and the survivor Bonds
While achievements in the field of health and medicine has led to a steady increase in life expectancy for many years, the aging of the population have a powerful financial pressure on pension plans governments around the world. Survivor bonds to help providers of annuities and pension plans to hedge this risk, as these liabilities are perfect for matching their liabilities in the presence of longevity risk.
Life expectancy and risk of death are sometimes used interchangeably, and can often mean the same thing. However, the risk of mortality may also be a way to Express the idea that a member might die at any moment, whether it is statistically expected later or earlier. This combination of longevity risk and mortality risk are presented at the level of a significant uncertainty in the operation of these plans, and can make it difficult to predict the total amount of payments, and how long is the payment period might last.
The General trend in the United States and other Western countries is that life expectancy is steadily increasing. The fact that people are living longer lives, tend to be a good thing, but it can be problematic for pension plans such as social security. Managers and annuity providers need to adjust their expectations of payments and change your financial strategy to accommodate this longer payment period that may be longer than anticipated.