Longevity hedging set to increase in 2013, says report

by Artemis on March 20, 2013

The market for longevity hedging, or the offloading of longevity risks via insurance, reinsurance and instruments such as longevity swaps, is set to grow again in 2013 according to the latest report from research firm Clear Path Analysis. The report suggests that 2013 could see record levels of longevity risk moving off the balance sheets of pension schemes who need de-risking services with pension risk transfer also set to become more accessible to smaller pension schemes too.

The report titled ‘Pension Buyouts and Longevity Hedging 2013′ features roundtable interviews with market participants, both on the pension scheme trustee side and the pension risk transfer service provider side. It has a focus on the UK pension risk transfer market, although much of the insight is transferable. Participants discuss the uncertain economic outlook, the impact that quantitative easing has and how increasing longevity expectations all factor into a pension schemes decision whether to hedge its longevity risk or not.

The report begins with a discussion on longevity itself and how medical progress can result in increasing longevity projections for the population. Dr Aubrey de Grey, Chief Scientific Officer of the SENS Foundation, says that with advances in medical science it is now becoming more difficult for actuaries to forecast future longevity extension with any degree of accuracy. He said; “It is widely believed that mortality rates will continue to decline and longevity to increase at rates that work out at a rise of about 2.5 years per decade in life expectancy at birth.” He goes on to explain that he personally predicts that life expectancy at birth in 2030 will not exceed todays by more than 2 years.

Of course a 2 year extension in longevity can have a massive impact on a pension schemes funding and ability to pay pension benefits, when it is considered across a whole cohort of pensioners, and herein lies the issue that longevity risk transfer attempts to provide a hedge against.

The report contains many insights on the pension risk transfer market which will be of interest to those operating in the space or looking at it as a potential future source of investment opportunity for capital managers. It’s telling that participants in the report believe that many pension schemes have been preparing themselves for the time when a longevity swap or risk transfer transaction becomes appropriate to their needs.

Some pension schemes have put in place triggers which allow them to measure key indicators which will alert them to the fact that it is time to launch a transaction. In 2012, many pension schemes put a lot of time and effort into ensuring their data on their longevity exposure was in a format that gave them insight into the risk and when the time would be right to enter the risk transfer market.

Eva-Maria Keller, Product Manager for Longevity at Deutsche Boerse commented; “Data is a key issue. If you consider hedging your longevity risk, it is very important to understand your portfolio and to have a clear view of the specific life expectancy of your pensioners compared to the population.”

The report also discusses the barriers to entry for smaller pension funds and discusses ways that they can access the market more efficiently. This section discusses the need for standardised solutions to allow longevity swaps to be structured more efficiently and cost-effectively, an issue that arises in the world of catastrophe bonds and insurance-linked securities too. One solution that is mentioned is the use of index based swaps, such as through initiatives like Deutsche Boerse’s Xpect Indices product, which would allow for a more transparent and traded approach to longevity hedging.

One area the report does not focus on at all is that of longevity risk securitization through structures similar in nature to cat bonds or ILS. This was an area of the longevity market which received a lot of attention after reinsurer Swiss Re brought the Kortis Capital Ltd. transaction to market, but it has yet to be repeated despite investors in the ILS space expressing an appetite for assuming longevity risk.

The report provides a useful update on some of the key issues facing pension schemes and the development of the longevity risk transfer market. You can sign up to download a free copy of the report here.

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Michael March 29, 2013 at 5:48 pm

Interesting post. I hope that The SENS Foundation is successful in eliminating aging. I think that it might be quite nice to live for hundreds or thousands of years.

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