Prudential & PIC in flow longevity reinsurance deal for smaller pensions

by Artemis on March 28, 2018

Prudential Financial and Pension Insurance Corporation (PIC) have joined forces to broaden pension de-risking for smaller pension schemes, by expediting the availability of longevity reinsurance through a flow arrangement, that sees Prudential providing guaranteed capacity to back PIC’s pension risk transfer deals.

The arrangement means that PIC can more efficiently offer pension buy-ins and buy-outs for smaller pensions, making the risk transfer available to schemes that in the past did not have the economies of scale to access risk transfer and reinsurance markets on their own.

Through the provision of an advance commitment of capital and known reinsurance capacity pricing from Prudential, as well as the bundling of multiple smaller pension risk transfer transactions into a single closing, PIC is able to more offer more efficient risk transfer solutions that meet the needs of small pensions and their retirees.

Prudential and PIC have tested this flow reinsurance structure throughout 2017, and said it has proven to be an effective tool for increasing the capital efficiency of the primary insurer, while also reducing the administrative burden for both the insurer and reinsurer.

Using the latest models and predictive analytics, this flow reinsurance arrangement is a systematic approach that streamlines the reinsurance transaction process for PIC’s smaller pension buy-in and buy-out transactions that meet pre-agreed criteria.

Prudential reinsures the longevity risks within these blocks of pension risk transfer transactions at the model-determined price.

“This approach is a win for PIC, a win for Prudential, and a win for the market,” commented Amy Kessler, Prudential’s head of longevity reinsurance. “It is a win for the market because it supports the continued growth of the small-transaction segment very effectively. It is a win for PIC because it has reinsurance capital lined up at a known price to support its fantastic work with smaller schemes. Finally, it is a win for Prudential because it helps us to efficiently reinsure a diverse and important segment of the U.K. market.”

By making the longevity reinsurance capacity available at pricing that is known, based on the modeled factors of the underlying risks, it means transactions can be bundled and flow more efficiently from insurer through to reinsurer, making bulk annuities accessible to smaller pension schemes than before.

In the past, longevity reinsurance capacity has been difficult or costly to access for smaller pension buy-ins and buy-outs, due to the complexity and administrative burden of pricing and executing contracts for every deal.

Prudential and PIC have collaborated on numerous pension risk transfer, longevity swaps and reinsurance deals over the years and began working together on this project around two years ago, as the pair sought to find a better, more efficient way to serve the risk transfer needs of smaller pension schemes.

The end result is a structure that makes the most of economies of scale, delivers execution efficiency and provides greater flexibility, helping both firms better meet the needs of the growing market for pension risk transfer.

Khurram Khan of Pension Insurance Corporation commented, “This evolution in longevity risk hedging brings with it greater automation and certainty to the reinsurance of U.K. bulk annuities. PIC continues to develop other such products in conjunction with enterprising reinsurers such as Prudential.”

Bill McCloskey, Prudential’s head of transactions for international longevity reinsurance, added, “This new process leverages Prudential’s and PIC’s innovative cultures and execution capabilities. We have enjoyed collaborating with PIC to help find better ways to address their needs in managing pension-related longevity risk.”

Read about many historical longevity swap and reinsurance transactions, in our Longevity Risk Transfer Deal Directory.

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