Date: Mon, 12 Dec 2005

The increase in people's life expectancy is proving a problem for many life insurance providers.

The so-called longevity risk could be costly for many insurers who agree to pay customers a guaranteed income for life.

Stephen Richards, a consultant specialising in longevity, believes that recent UK data shows that life expectancy is increasing by over four per cent a year, compared to past increases of just one to two per cent per annum, reports the Financial Times.

However, the main problem facing life insurance companies is that there are no set calculations to assess the risk of longer living and therefore factor the additional cost into premiums.

"The reinsurance market works very well as a way to lay off some of the longevity risk, but it’s not the answer for everyone," said Jeremy Bennett, global head of Credit Suisse First Boston's structuring group.

"Longevity trading has happened, but what’s out there, so far, is sporadic and we don’t have a reference like Libor (London Interbank Offered Rate, a borrowing benchmark). With this index, we are introducing a kind of Libor for longevity – a benchmark that is easy to understand, rely on and trade around," he added.

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