Goldman Sachs Group, Inc. (NYSE: GS) has launched the first index that will allow the market to measure, manage, and trade exposure to longevity and mortality risks in a standardized, transparent, and real-time manner. 

Longevity and mortality are the risks that realized lifespan differs from expected lifespan, creating an economic consequence, often a price change in an asset or liability.  Holders of mortality risk — typically institutions such as insurance carriers and reinsurers — are economically exposed to a decrease in lifespan (i.e. if you die 4 years after you sign up for a $200,000.00 life insurance policy), while holders of longevity risks (i.e. if you live to 100 instead of 78 and on a pension that an employer must pay)– pension funds, annuity writers, the social security trust fund or life settlement investors — are exposed to an increase.

QxX.LS, the first in an expected series of indices, will be a representative sample of the US SENIOR INSURED population over the age of 65. The initial index will reference a pool of 46,290 de-identified lives and is based on a population designed to address risks to which major market participants are exposed and is independently tracked monthly, providing real-time publication of mortality information.

Published index rules and trading calculators are available on the QxX website at http://www.qxx-index.com, ensuring observability and transparency. Hedge funds, banks and asset managers with existing positions in the cash longevity market (pensions, viatical settlements, defined benefits, etc), or those with an interest in gaining synthetic exposure to this uncorrelated risk class, will be able to use the index to either hedge existing exposure or to initiate investments.

If you have ever heard of viatical settlements or if you know someone who is over 80 and healthy still clipping a pension on top of social security, then you’ll understand that this may actually be the first of many such measurements.  Prior to that, an actuarial had to use historical data that isn’t always complete. 

This may sound heartless but it’s a great start for the long-term strength of some of these financial institutions.  Should you expect more of these index variations?  You bet your life.

Jon C. Ogg
December 14, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.

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