Longevity risk; a 4,000 pound gorilla destined for the capital markets

To date there has only been a single insurance-linked security transaction which transferred the risk of policyholders living longer, or longevity risk, to the capital markets. That transaction, Kortis Capital Ltd. which was sponsored by Swiss Re, successfully came to market in December 2010 but so far no-one else has tried to emulate the deal.

An interview published by A.M. Best (available here on InsuranceNewsNet.com) with Pierre Ozendo, the soon to retire Chairman and CEO of Swiss Re America, suggests they may try to repeat the transaction themselves or devise new capital markets risk transfer structures to suit the transfer of longevity risks.

Mr. Ozendo gave A.M.Best his thoughts on a number of issues, one of which being insurance-linked securities. He said:

Insurance Linked Securities are essential. How do we broaden the aspect of coverage to go beyond just cat bonds, to go beyond embedded value life portfolios? What are we going to do with longevity risk? That’s the 4,000 pound gorilla in the living room. Such long-term risk is so huge, only the capital markets can be big enough to be able to insulate it. We need a capital market response. We don’t yet know how, but we’re working it. We could mix long-tail and short-tail lines in an ILS. We need to keep working on that to bring a broader spate of products to the market.

It’s clear from Mr. Ozendo’s comments that he see’s the capital markets as the best available (perhaps only) source of risk capital with the capacity to successfully address longevity risks. The size of a longevity risk transfer market could be in the trillions of dollars and it’s hard to see how the capital markets could (or would have an interest in) assuming all of the risk. However the capital markets is perfectly suited to becoming an additional source of reinsurance cover for at least a portion of these longevity exposures.