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Deutsche Börse launches longevity indices for securitisation of life and pension risks

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Deutsche Börse has expanded its index offering with the launch of Xpect, a range of longevity data indices that allow the valuation of longevity risk and can serve as a basis for fina

Deutsche Börse has expanded its index offering with the launch of Xpect, a range of longevity data indices that allow the valuation of longevity risk and can serve as a basis for financial instruments, such as for the securitisation of life and pension insurance risks, enabling insurance companies and pension funds to increase their capital efficiency and lower their required risk capital.

The Xpect Indices will be offered as two index types, providing information on life expectancy and mortality risks in Germany and the Netherlands, broken down according to region, year of birth and gender. The 18 Xpect Cohort Indices track the mortality of a model portfolio of 100,000 people born in each of 20 consecutive years, while the Xpect Age Indices measure the average remaining life expectancy of the population aged 65 and over.

The Xpect Cohort Indices will be calculated on the third Friday of every month, and the Xpect Age Indices annually in October. According to Deutsche Börse, they will provide more frequent, fast and up-to-date standardised and transparent information on the current development of longevity in the various categories for investors and market participants.

Xpect Cohort Indices track particular groups within the population, defined by year of birth and gender. On the basis of this demographic data, the index represents a closed portfolio (for instance of policyholders) starting from a defined date with an initial value of 100,000.

The total number of people in the portfolio is corrected according to the number of deaths, converted for the portfolio, on a monthly basis. The index level thus represents the number of surviving members of the original group of 100,000 people. Deutsche Börse calculates 10 Xpect Cohort Indices for Germany and eight for the Netherlands, each representing the two genders in cohort groups of 20 years of birth.

Xpect Age Indices represent the average remaining life expectancy of a defined age and gender group. This involves multiplying, on an annual basis, every year of birth of the age group between 65 and 90 years by the current total life expectancy, and then dividing the sum of these results by the total population in that age group.

This figure is of particular interest to pension funds, as it enables them to estimate expected payments much better and more accurately. A more transparent index also allows risks associated with higher life expectancy in the population to be placed on the capital markets. The Xpect Age Indices are calculated and disseminated in a standardised form for people of retirement age (over 65) separately for men and women.

In addition to the standardized Xpect Cohort and Xpect Age index concepts, Deutsche Börse also calculates tailored indices for its clients, applying structure and calculation method according to the client’s requirements and portfolios.

The Xpect Indices are based on Xpect Data service offered by Deutsche Börse’s Market Data & Analytics division since March. Data on population trends in Germany and the Netherlands is collated from various sources, checked, calculated and disseminated on a monthly basis, compared with every three to five years for longevity data previously available from other sources.

The Market Data & Analytics business calculates and publishes a total of more than 2,500 indices and compiles, distributes, and markets independent capital market information, such as price data, trading statistics, and back office information for banks and financial institutions.

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