Longevity risk transfer & reinsurance opportunities in Brazil

The Brazilian pension fund market faces growing longevity risk and the regulator is calling for insurers to create products to address this, which will result in new opportunities for the longevity swap and reinsurance providers to tap into a new geographic region.

The Superintendency of Private Insurance has estimated that a longevity risk transfer market with volumes of USD$5.5 billion (20 billion Brazilian Real) is required for the immediate longevity risk transfer needs of pension funds in the country.

To date, much of the longevity risk transfer markets capacity has been deployed into transactions in the UK, the Netherlands, Canada and countries such as Germany. Opening up a market in South America would be welcomed by major global reinsurance firms looking for new risks to deploy capacity into and geographic diversification.

According to Brazilian insurance industry blog Sonho Seguro the first requests for authorisation of new longevity insurance products have already been sent to the Superintendency of Private Insurance (SUSEP), with approval expected later this year.

Once approved the expectation is that as much as 10 billion Brazilian Real of longevity risk could be transferred to insurers and reinsurers from Brazil next year alone, growing to 20 billion BR within a few years.

“This (longevity risk) is a new and extremely attractive market that is opening up to the insurers. The R $ 20 billion will not be realized in the very short term, but over a horizon that is not many years. The need for protection for longevity risk is immediate,” Roberto Westenberger, superintendent of the regulator is quoted as saying.

There is an expectation that Brazilian insurers will become the first providers of longevity risk transfer capacity in the country, but it is likely that global reinsurance markets will track the development of a new market for longevity risk and seek to enter it as quickly as possible.

It will be interesting to see how Brazil approaches longevity risk transfer. Whether it opts for the longevity swap structure or whether its pension funds seek to directly access the reinsurance markets, as we see most often in the UK today.

For large global reinsurers, longevity risk is currently a very attractive business, acting as a natural hedge for their mortality exposures and providing attractive returns.

As longevity risk transfer goes global, with new markets likely to open up in other regions of the world in the next few years, the opportunity to provide capacity to assume longevity exposures will increase.

As a result the capital markets interest in longevity risk transfer will also continue to grow, with the expectation still in place that eventually the very large reinsurers assuming this risk will require a source of retrocession, or capacity support from capital markets investors.

The development of a longevity risk transfer market in Brazil will provide a new level of diversification within the global market for longevity exposures, helping to ensure further growth.