Longevity risk is a financial and actuarial term used to describe the potential risks attached to the increasing life expectancy of pensioners and policy holders, which can eventually translate in higher than expected pay-out-ratios for many pension fund

Pension fund

A pension fund is any plan, fund, or scheme which provides retirement income.Pension funds are important shareholders of listed and private companies. They are especially important to the stock market where large institutional investors dominate. The largest 300 pension funds collectively hold...

s and insurance companies.

Some actuarial mathematics experts have argued that longevity risk constitutes by far the most significant source of risk after interest rates and inflation

Inflation

In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...

, and that, unlike interest rates and inflation risks, longevity shocks persists over time. Going forward, customized longevity swap

Swap

- Finance :* Swap , a derivative in which two parties agree to exchange one stream of cash flows against another* Barter- Technology :* Swap space, related to a computer's virtual memory subsystem...

s and index-based longevity hedges (both embryonic, illiquid, financial instruments at the moment) might ultimately provide the required level of hedging for longevity risk.