Sidecars to let investors access pension & longevity risk: Kessler, Prudential

Insurance or reinsurance sidecar vehicles will be put to work to enable investors to co-invest alongside insurers and reinsurers in the pension and longevity risk transfer market, predicts Prudential’s Amy Kessler.

Investors have been accessing some longevity risk transfer transactions over the years and some insurance-linked securities (ILS) funds are active in the life, longevity and to a degree annuity space, but Kessler believes that innovation in the pension risk transfer market will enable more institutional investors to benefit from pension risk related returns.

Kessler expects a raft of innovation in the longevity and pension risk transfer space.

“What we need in the market are more solutions for pension funds that are not yet on the road to a lower risk future whose progress has been impeded by today’s low rates,” Kessler explained. “With a decade of innovation behind us, we see a lot more work to do. We need risk solutions for pension funds on the road to risk transfer and solutions for collective defined contribution schemes as well as adaptations to serve many more countries.”

One of the areas of innovation Kessler anticipates is an increasing use of third-party and alternative capital to support large risk transfer and reinsurance deals in the pension or longevity space.

The sidecar vehicle is seen as a way that investors could share in the fortunes of these transactions, following the underwriting and analysis of insurance and reinsurance players, while taking a portion of the returns.

“Sidecar arrangements will allow investors to co-invest with the insurers and reinsurers in the pension and longevity risk transfer market. Sidecars allow investors to take on the risk and benefit from the return of specific books of insurance and reinsurance business. This approach has many advantages,” Kessler told Artemis.

“In some transactions, investors may be able to take a proportionate share of profits and losses along-side a reinsurer with its own capital at risk on the same terms. This approach would allow investors to benefit from the insurance and actuarial expertise as well as the access to big data that reinsurers use to analyze these opportunities,” Kessler continued to explain.

The market at the moment is dominated by large insurance and reinsurance players with big balance-sheets, meaning the ILS market has been shut out to a degree from the longevity risk transfer space.

Of course there is also the issue that for pension funds investing in longevity related risk is not attractive, as they already have this risk on their own books. However, other large institutions and investors like family offices are attracted to this risk and if the correct way to structure the opportunity can be found the capital could likely be raised to support it.

Kessler noted that we may be some time off seeing the first pension risk or longevity sidecars come to market.

“But the market may not be quite ready for this ideal version of sidecar investing,” she said, “It may be easier to get this market started if we allow several market participants to come together, each taking their preferred sliver of risk.”

The longevity and pension risk transfer market has always promised capital market involvement, but the way it has developed has not allowed for that yet. This positive idea from Kessler suggests we could see structures begin to emerge that would enable investors to participate in this market more fully.

Sidecars for pension risk transfer could also enable smaller players in the life and pensions insurance or reinsurance space to augment their capacity using alternative capital. That could help them to become more relevant in the space and grow competition as well.

Some ILS funds, with life related strategies, may be keen to partner with specialist pension risk transfer firms, with a sidecar type structure a very good solution for this type of arrangement.