Pension funds increasingly looking at longevity risk transfer

Longevity risk was one of the topics discussed at the recent Swiss Re ILS media briefing Artemis attended. It’s a topic that is gaining increasing attention from re/insurers and also pension funds and it is a huge potential market which could open up to risk transfer to the capital markets.

Alison McKie, Swiss Re’s Head of Global Life & Health Risk Transformation discussed the potential for a market in longevity risk transfer. Global longevity exposure is estimated to be around CHF 20 trillion (over USD$20 trillion) of pension assets she said. With a figure that large at risk it’s no surprise pension funds are taking their longevity risks seriously and looking for ways to mitigate them. 90% of that exposure is related to pension funds and 10% to insurance contracts according to Swiss Re.

During her talk, McKie highlighted the fact that there is not enough re/insurance capacity available to assume all that longevity risk so if the risks are to be mitigated then it’s critical that the capital markets and reinsurers find a way to transfer a portion of those risks. With longevity forecasts showing an increasingly aging population globally, the amount of risk attributed to longevity is only going to grow.

Pensions schemes, said Swiss Re, look to transfer their longevity risks on an indemnity basis, where as the capital markets prefer to work on index based solutions. Swiss Re see themselves as a risk aggregator who can help pension funds by acting as intermediaries; taking on the basis risk and offering client solutions and producing capital market instruments. Developing a liquid market in longevity risk transfer is seen as essential to provide the capacity required but challenges exist such as duration, liquidity, credit risk and modelling, said McKie.

Swiss Re are currently testing the water with the Kortis Capital Ltd. longevity risk catastrophe bond. This is the first attempt to issue a pure longevity risk insurance-linked security and if successful could open the doors for other cedents to tap the capital markets appetite for ILS.

Further evidence that pension funds are taking risk transfer seriously emerged yesterday when Global Pensions wrote about Dutch pension fund manager PGGM researching ways to transfer its longevity risks off its balance sheet.

The ART market has a crucial role to play in the creation of a liquid market in longevity risk. Swiss Re are leading the way and with other initiatives such as the Life & Longevity Markets Associations efforts to standardise documentation for longevity swaps it looks likely that some sort of market will emerge in 2011 with pension funds likely becoming the main beneficiary.