Longevity reinsurance & risk transfer to go global: Prudential’s Kessler

The global longevity risk transfer market is primed for further growth as pension funds increasingly look to de-risk their pensions plans and, similar “catalysts that transformed” the U.K. longevity reinsurance sector begin to make moves in the U.S. and elsewhere, says Amy Kessler.

In recent times the longevity insurance and reinsurance market has witnessed exponential growth, particularly in the U.K., which is home to the largest longevity market in the world, but increasingly the U.S., Canada, the Netherlands and beyond are starting to show signs of ‘inevitable’ expansion.

“Globalization is just beginning with activity spreading quickly from the U.S., U.K., Canada and the Netherlands to France, Germany, Switzerland, the Nordics, Australia and beyond. Continued growth in the longevity risk transfer market is inevitable,” advised Kessler.

According to Kessler, Senior Vice President (SVP) and head of Longevity Reinsurance at Prudential Financial’s Pension Risk Transfer unit, since 2007 approximately $250 billion worth of U.S., U.K. and Canadian pension liabilities have been transferred to global re/insurers, with the majority occurring in the U.K.

Broken down by region and the rough $250 billion figure is as follows: $179.8 billion in the U.K., $67.3 billion in the U.S., and $16.2 billion in Canada. So it’s clear that the U.K. is leading the way in longevity risk transactions.

Kessler, speaking recently in France at the Eleventh International Longevity Risk and Capital Markets Solutions Conference, predicts that over the next few years the global longevity market will double in size, amidst an ageing population and a growing demand from insurers, reinsurers and capital market participants to assume longevity exposures.

Towards the close of last year financial services ratings agency A.M. Best, predicted further growth of the pension risk transfer market in the states and globally during 2015, following significant expansion during 2014 and also citing an expectation that insurers and reinsurers in the space will likely face heightened competition from the capital markets.

Some nine months down the line, although failing to discuss how much of a role capital market solutions will play, in an interview with A.M. BestTV Phil Waldeck, also from Prudential Financial, said that re/insurers are increasingly “playing a role in taking on those obligations and being responsible for the retirement security of hundreds of thousands of retirees.”

A key driver for the predicted expansion of the global longevity risk transfer sector derives from the pioneering product innovation and development witnessed in the U.K., a trend that has increasingly caught the eye of North American counterparts.

“In recent years, North American plan sponsors have watched U.K. developments with growing interest,” confirmed Kessler, continuing to stress, “that many of the same catalysts that transformed the U.K. marketplace are now arriving in the United States and beyond.”

Some of the most recent longevity risk transfer transactions include Prudential reinsuring $2.9 billion of longevity exposure for Legal & General, Dutch firm Aegon hedging €6 billion of longevity reserves in the Netherlands, and the AXA UK pension scheme, which entered into a £2.8 billion longevity swap transaction with Reinsurance Group of America (RGA) earlier this year.

Kessler explained; “Today, all kinds of companies are benefiting from flexible risk transfer solutions that secure member benefits and help corporate sponsors achieve a lower-risk future.”

With the global reinsurance market continuing to see ample levels of capacity from alternative and traditional capital providers, and a growing appetite and willingness from market participants to assume the diversification and returns of large lines of longevity risk from pension schemes, large life insurers and reinsurers, the market has become progressively competitive in recent times.

The intensely competitive landscape was highlighted by RGA in August this year, when Chief Executive Officer (CEO), Albert Greig Woodring said, “We certainly expect the longevity market globally to remain active, and increasingly so… There is a plenty of competition.”

With the majority of longevity swaps, or longevity reinsurance transactions taking place in the U.K. naturally competition there is most fierce, but as noted by RGA, and Prudential’s Kessler and Waldeck, a desire for geographical market expansion and diversification will lead to opportunities in new, emerging longevity markets.

Like Brazil for example, where the Superintendency of Private Insurance and the Brazilian pension fund market have called on re/insurers to create products to address its burgeoning longevity risk market.

In order for longevity risk transfer markets to flourish in new regions it will require the same levels of innovation and development that helped the U.K. market attain its current dominant status.

Furthermore, and something we’ve discussed previously here on Artemis surrounding the growth of longevity risk transfer, is that albeit copious, the capital base of the traditional reinsurance market might not be enough to support the longevity sector’s rapid growth, signalling an opportunity for capital market participants, including insurance-linked securities (ILS), catastrophe bonds and other alternative capital providers.

Finally, another element of the longevity market that will aid its growth is the establishment and development of platforms designed to ease the process of longevity reinsurance transactions.

One such example can be seen with insurance and reinsurance brokerage firm Willis Group, which in June launched a captive type solution to enable pension funds to establish their own insurance intermediary, simplifying access to global longevity reinsurance capacity.