Life and Mortality-Linked Securities
Definition
Life and mortality-linked securities transfer life insurance risks to capital-market investors. Extreme mortality bonds lose principal if a mortality index, built from public population data for defined countries, rises above a threshold over the measurement period, protecting the sponsor against pandemics, large disasters or other events causing excess deaths. Other life ILS cover lapse, longevity or reserve financing.
Why it matters
Mortality bonds add a peril that is largely unrelated to hurricanes and earthquakes, but not to markets in every scenario: a severe pandemic can hit both mortality and asset prices. Index triggers make them transparent; the risk is in how often extreme mortality events occur and how the index is built.
Common misconceptions
- •A pandemic bond is not health insurance; it pays the sponsor when population deaths exceed a threshold.
- •Mortality indexes use population data, not the sponsor's policies.
- •Low correlation with property catastrophes is not low correlation with all markets.
- •The label is only a starting point. Investor outcomes usually depend on the governing documents, cash-flow priority, valuation policy, disclosure quality, and manager discretion surrounding the term, not just the shorthand definition used in marketing materials.
Technical details
Risks in life ILS (Swiss Re 2011)
Mortality and morbidity.
Lapse: more or fewer policy terminations than expected.
Investment performance on assets backing reserves.
Sponsor credit.
How investors apply the term
Investors usually apply this term by tying the definition back to the controlling documents and then asking which cash flows, rights, restrictions, or valuation assumptions it changes. A useful review looks at the term alongside fees, leverage, liquidity, reporting frequency, and manager discretion rather than treating it as a standalone concept.
The practical diligence test is simple: identify who benefits if the assumption is wrong, who has control when conditions change, and what evidence the investor receives after closing. Terms that cannot be reconciled to documents, cash movements, and monitoring data should be treated as marketing shorthand until proven otherwise.
Frequently asked questions
- What is an example?
- Swiss Re's Vita Capital program: in October 2010, Vita Capital IV issued two series providing Swiss Re with $175 million of protection against extreme mortality in the United States and Japan (Series III) and Canada and Germany (Series IV), bringing the program to seven takedowns and $1.76 billion since 2003, according to Swiss Re's 2011 primer.
- How is the trigger measured?
- By a 'Mortality Index Value which references publicly available population mortality data,' not the sponsor's own claims, with an independent risk modeler assessing the risk of elevated mortality from causes such as infectious diseases, terrorism and natural disasters.
- How are life risks different from property catastrophe risks?
- Life contracts run for decades and can involve policyholder behavior (lapses) and investment performance as well as mortality; Swiss Re's primer lists lapse, investment performance and sponsor credit among the risks investors must understand.