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Market NewsCommentLongevity, ice age, warming and indices

Longevity, ice age, warming and indices

By Charles Wyndham.

In the Financial Times earlier this week there was a story entitled ‘When old age becomes a risk factor’.  

Seems a bit obvious to me personally, anyway, the basis of the article is about the Credit Suisse First Boston’s (CSFB) launch of  the first US index aimed at helping insurers and pension schemes to hedge longevity risk.

We are all being assailed by the news that every single country has got a huge black whole in its pension provisions, insurers and companies are having their P& L accounts swamped by the need to increase their contributions to cover this cost.

I am beginning to think that anyone who survives above 50 should start to feel exposed.

So, another index and another financial derivative for an industry to hedge based on an accepted index.

Reading this brought me back to the story we published sometime ago now, written by Brian Harmon de Clare Global, Head of Commodity Marketing and Financial Markets for ABN AMRO.

The article set out why financial derivatives were potentially of considerable benefit for the diamond industry. 

As he put it “this (hedging instruments) would allow clients to remove uncertainty in the diamond price by providing a medium to deal in a forward market, which will remove much of the uncertainty of price movement.”

The article produced a myriad of comically hysterical screams of indignation from many in the industry.

Since then price volatility, as PolishedPrices forecast, has increased dramatically, and we believe is set to increase even more.

In addition to price volatility, supply volatility has also increased.

The DTC’s ITO’s (Intention to Offer), in a desire to provide more flexibility, have in fact resulted in the positive concept being rendered valueless for all but the largest of clients.

Even when there was more stability, the fact that the ITO’s are limited to six months is a substantial minus to companies who have to work on a much longer time cycle and certainly need a minimum of twelve months for it to have any real meaning.

The political shenanigans that are going on in the diamond industry in Southern Africa only adds to the general uncertainty.

Therefore, against this backdrop, the reluctance in the industry in being able to get its mind around the potential benefits of financial instruments based on transparent and independent pricing provided by PolishedPrices should be surprising.

The fact that it is not, is simply a function of knowing that the industry has always preferred to continue to live in the ice age despite the global warming going on around it.

At least we will all be able to hedge the time that it is going to take to get to the warming stage using the CSFB longevity index which like the PolishedPrices index is published on Bloomberg.


 

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