Swiss Re, SCOR in £5 billion longevity swap transaction for Aviva

Global reinsurance firms including Swiss Re and SCOR have participated in what is being dubbed the largest ever pension scheme longevity swap, a £5 billion transaction for UK insurance, life and pensions firm Aviva.

This longevity risk transfer transaction is a little different though as it saw the risk directly transferred to the panel of reinsurance firms, rather than being swapped with an insurer first and then reinsured as a secondary transfer.

The £5 billion ($8.4 billion) longevity swap (or perhaps just longevity reinsurance) transaction is the latest and largest in a string of growing UK pension scheme risk transfers. These longevity risk swaps are designed to place the risk that the financial commitment to pension scheme members is extended as they live longer into the hands of reinsurers, or capital markets players.

The transactions have tended to result in reinsurers being the ultimate bearer of the risk, they are considered better able to hold the longevity risk and also like to assume longevity as a partial hedge to mortality risks. Capital markets investors require the risk to be structured into an investable form and a lack of liquidity in the longevity risk transfer market has not see third-party capital become a major player in it yet.

The transaction protects the Aviva Staff Pension Scheme against the risk that members live longer than expected, which would result in greater than expected or modelled payouts. The deal covers 19,000 members along with their widows or widowers and civil partners.

Thierry Léger, Global Head of Life & Health Products at Swiss Re commented; “We are delighted to be supporting Aviva with this transaction. It is a landmark deal for the longevity market because it proves that longevity reinsurance solutions can serve the needs of our largest insurance clients. We know that life expectancy is growing – this type of insurance provides peace of mind that there is protection in place no matter how long people live.”

The longevity risk related to £5 billion of pensioner liabilities were transferred from Aviva Staff Pension Scheme to Aviva Life & Pensions UK Ltd, so negating the need to be transferred to an external insurer and allowing Aviva to act as its own intermediary insurer, and then ultimately to the global reinsurance market. Reinsurers Swiss Re and SCOR were joined by one other reinsurance firm in the transaction.

Daniel Harrison, Global Head of Longevity Solutions at Swiss Re said; “There is a compelling rationale for pension plans and insurers to transfer their longevity risk to reinsurers. We have a natural offset with our mortality business, the capacity to write the business onto our balance sheet, and the expertise to tailor the transaction to meet our client’s needs.”

Paolo De Martin, CEO of SCOR Global Life, added his comments; “This significant longevity transaction is fully consistent with SCOR’s risk appetite and longevity strategy and it satisfies our Group profitability criteria. Coming just a few months after closing the transaction with Aegon in the Netherlands, it demonstrates SCOR Global Life’s strong skill set in the global longevity market. SCOR is an important participant in this market and we look forward to partnering with more customers to offer longevity solutions in the months and years to come.”

Denis Kessler, Chairman and Chief Executive Officer of SCOR, stated; “This transaction is notable not only for its size but also as a demonstration of the partnership approach we adopt with our clients. With such a complex transaction, it is vital to find a solution that works for the employer, the trustees and the reinsurer. I am delighted with this further step towards meeting the ambitious targets SCOR has set out in its “Optimal Dynamics” three-year plan.”

The longevity transaction took effect as of the 1st January 2014.