Deutsche Börse launches longevity indices

1 December 2008

Deutsche Börse has further expanded its index offering, adding Xpect, an innovative index family for longevity data from 1 December. Longevity indices serve for the valuation of longevity risk and they also serve as a basis for financial instruments, e.g. for the securitization of life and pension insurance risks. Insurance companies and pension funds will thus increase their capital efficiency and lower their required risk capital.

The Xpect Indices will be offered as two different 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. 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. They will be disseminated via the CEF® data feeds. This means that standardized and transparent information will be available more often, more quickly and more up-to-date on the current development of longevity in the various categories for investors and market participants.

Xpect Cohort Indices track so called cohorts. A cohort refers to a particular group in the population, defined by year of birth and gender. On the basis of this demographic data, the index represents a closed portfolio (e.g. 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 ten 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 than before. A more transparent index also allows those risks to be placed on the capital market which are associated with higher life expectancy in the population. The Xpect Age Indices are calculated and disseminated in a standardized 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 the data service of the same name – Xpect Data, offered by Market Data & Analytics since March 2008. Xpect Data offers the most up-to-date figures for quantitative valuation of longevity risk. The data on population trends in Germany and the Netherlands is collated from various sources, checked, calculated and disseminated on a monthly basis. Data on longevity was previously available from other sources in the market only every three to five years. Xpect Data forms the basis for up-to-date and regular calculations and assessments of generation mortality tables. Xpect Data is based exclusively on transparent and objective statistics, and not on expert opinions.

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