Dec 18

Hedging Death: Goldman Sachs at Your Service


The only major investment banker to laregly escape from the current sub prime woes unscathed, has announced the first of a series of indices that will allow insurers and others to hedge mortality risk.  Goldman Sachs is behind the new QxX index that allows investors to be long or short mortality risk, using real time pricing information and execution (no pun intended).  Atleast that is the plan, as this is truly in its infancy.

Just as in credit default swaps, insurers and others will be able to sell mortality protection (long mortality risk) or buy mortality protection (short mortality risk).  This mortality index (expected to be enhanced and added to over time) is a representative sample of the US senior insured population over 65 years old.  The initial index references a pool of over 46,000 de-identified lives.  Undoubtedly, if this approach is successful, we will see mortality indices based upon lives outside of the 65+ group.

There is much more detailed information at

Mortality risk is a serious issue for life insurers who have typically used a mix of life and annuity products to ‘hedge’ mortality risk.  This index may provide a more granular approach to hedging this key risk.

In addition, there is the outside chance that other insurers, such as PC insurers, may want to diversify their insurance exposures by adding life insurance business.  Previously, this would be done via acquistion, but, perhaps this will be done via derivatives contracts in the future.

And, there is no telling what impact this will have on the burgeoning life settlements business.  Perhaps this added transparency may accelerate both the reduction of the imbedded egregious fees and the acceptability of life settlements as an alternative investment.  Perhaps not.

In any event, this is certainly the beginning of the end of another risk that ‘could not be hedged’ effectively.  If only Goldman or another firm could come up with a hedge for liquidity risk….