Expect more capital markets competition on longevity risks: A.M. Best

Traditional insurance and reinsurance firms should expect an increasing amount of competition for longevity risks and longevity reinsurance transactions from capital markets participants, according to rating agency A.M. Best in a report on pension risk transfers.

The briefing from A.M. Best discusses the pension risk transfer market in the U.S. and globally, suggesting that these markets have ‘heated up’ in 2014 and that further growth is likely in 2015, as increasing numbers of pension funds or schemes look to insurance, reinsurance and also capital markets solutions to help them to offload pension risks including longevity exposure.

In the U.S and globally interest in pension risk transfers keeps rising as low interest rates, increasing longevity risks due to updated mortality tables, rising costs and pension plans desires to offload risks associated with managing defined benefit schemes grow.

Prudential Financial continues to dominate the provision of pension risk transfer and longevity re/insurance capacity, according to the briefing, as well as growing its footprint in UK longevity risk and reinsurance transactions during 2014. However competition for the large deals is growing as more re/insurers become interested in accessing pension risk transfer deals and longevity risk as new opportunities in a pressured re/insurance market.

As well as traditional life insurance companies, reinsurers are increasingly interested in U.S. and UK longevity risks, says A.M. Best, while competition is increasing in their traditional markets. So longevity risk may be seen as a diversifier for reinsurers seeking to avoid competitive areas of the market in 2015, which with no signs of that pressure decreasing and longevity also offering a natural hedge for mortality risks (to a degree) shows that longevity capacity could become increasingly competitive as well.

A.M. Best also says that the traditional insurance and reinsurance players in pension risk transfer and longevity risk markets could face additional pressure from the likes of asset managers and capital markets participants. Some of these players, such as investment banks, already provide advise on these pension risk transfer deals so bringing capital to them may be a natural progression.

Longevity risk in particular continues to be attractive to investors as it provides another source of return which has a low correlation with wider financial markets, in a similar manner to catastrophe risk.

A.M. Best expects the interest in pension risk transfer and longevity risk transfer deals in the U.S. will increase in 2015, as simply maintaining defined benefit pension plans becomes increasingly burdensome for pension funds.

Deal flow is expected to be driven by the increased mortality assumptions from updated actuarial tables, higher Pension Benefit Guarantee Corporation premiums and costs associated with managing DB schemes, the inability and unwillingness of sponsors to manage volatility related to longevity and investment risk, as well as growing demand for longevity risk from reinsurance companies and capital markets participants.

Only a handful or companies have the capacity to pursue the $1 billion plus deals but an increasing number of smaller deals, as well as an expectation that to a degree longevity risk transactions are likely to be increasingly syndicated, could mean that capital market investors can increasingly access this sector.