Longevity reinsurance resource constraints lead to pinch-points: Aon

by Artemis on October 12, 2015

A lack of manpower and resources for pricing longevity risks in the global reinsurance market is resulting in pinch points at times, making timing especially important for pension funds looking to hedge their longevity exposure, according to Aon Hewitt.

Despite the global reinsurance market and many large insurance players having a significant appetite to assume longevity risks, manpower resource constraints are said to be making accessing capacity more difficult.

Aon Hewitt, the pensions, human capital and advisory arm of risk, insurance and reinsurance broker Aon, says that the resource constraints are concentrated in reinsurer pricing teams which has led to pinch points in the market at various times.

This makes a “suitably structured and timed approach to the reinsurance market” important, Aon Hewitt explained in its latest risk settlement market report today.

The longevity swap and risk transfer market has seen a busy year so far. In 2015 to date Artemis has recorded over $43.5 billion (£28.3) of longevity risk transferred in swap and reinsurance transactions.

Among those are UK pension fund transactions, where pensions transfer longevity risk associated with defined cohorts of pensioners to global insurance or reinsurance firms. Aon Hewitt says that it expects to see more similar transactions before the end of the year.

Additionally some of the longevity transactions seen in 2015 have featured UK insurers offloading the longevity risk associated with annuities business to reinsurers, enabling insurers to enhance their capital efficiency in advance of the incoming Solvency II regulatory environment which begins next year.

The appetite to assume longevity risk remains high, Aon Hewitt says, but the resource constraint is making it more difficult to access reinsurance capacity. Aon Hewitt notes that the reinsurance market can see “competitive tension” over the price of longevity risk transfer, which with resources constrained makes timing even more important.

Constrained resources in reinsurance pricing teams could help to push the need for a standardised approach to longevity risk transfer. A number of initiatives have tried to create index based approaches to longevity swaps, which could result in more standardised pricing and greater liquidity.

If resource constraints at reinsurers remains an issue it could result in prices going up, which may push potential sponsors of pension longevity risk transfer deals to look again at the more standardised offerings.

Encouragingly though, Aon Hewitt highlights the range of ways that pension funds or insurers can access longevity risk transfer capacity, from the direct to the intermediated route.

There is no “one size fits all” approach anymore, meaning that it is vital that pension funds not only understand timing but also the pros and cons of structures and the direct over intermediated routes to the longevity risk transfer and reinsurance market.

Read about recent longevity swaps, longevity reinsurance and longevity risk transfer transactions here.

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