Longevity risk transfer demand shows no signs of slowing: Kessler, Prudential

There is no sign of a slowing in demand for longevity risk transfer and reinsurance solutions, as pensions continue to seek out partners to help them transfer their exposures and longevity risk itself looks set to increase again, as health advances could accelerate longevity improvements.

Commenting on the longevity reinsurance and risk transfer market, Amy Kessler, head of longevity risk transfer at Prudential Financial, gave her view on the outlook for this segment over the coming year.

“The pension de-risking market is growing at its fastest pace in years, in part because such activity has become more affordable than at any point in the last decade,” Kessler explained. “We foresee an unusual number of longevity reinsurance deals worth £1 billion–£4 billion that are in the market in 2018.”

Kessler puts the explosion of activity down to strong demand for longevity risk transfer and pension de-risking solutions, alongside robust capacity to support the market.

It’s also been helped by many UK pension funds reaching fully funded status this year.

New entrants to this market, both insurance and reinsurance firms, are helping to increase capacity, Kessler explained.

But the market for longevity reinsurance and pension de-risking solutions remains balanced, as, “Although overall competition is vibrant, the market is not overly competitive, as demand for de-risking solutions continues to grow,” Kessler said.

While longevity improvements have slowed in recent years, which Kessler attributes as a factor that has helped to keep risk transfer prices more affordable, this may not be the case for long.

“The current, slower pace of longevity improvement is unlikely to persist as there are several possible health advances that could re-accelerate the pace of longevity gains in the years ahead,” according to Kessler.

This could ramp up demand for risk transfer, but also make accessing sources of longevity insurance and reinsurance capacity more expensive as well.

In addition, another factor that could impact the equilibrium of the longevity risk transfer market is global demand.

Kessler commented, “The globalization of pension de-risking, beyond the U.S. and U.K., is happening now. In recent months, there have been two notable pension risk transfers in Germany, together worth more than $5 billion. We expect this type of activity to grow.”

With these efforts often led by companies with several pension funds around the world, their experience in one country (such as the UK) can lead them to seek out de-risking opportunities elsewhere as well, which could all add to pressure on available capacity in future.

While some pensions have been waiting it out in the hopes of even more attractive pricing of pension risk transfer and longevity reinsurance, Kessler warns that this could be a dangerous game.

“There is risk in waiting. Pensions that decide to keep their risk rather than hedge it—hoping for even lower prices— are maintaining a risky strategy. Managing high-risk market positions requires navigating the volatility of markets, interest rates and currencies, all of which are compounded by longevity risk. Pension risk transfer, by contrast, is an all-weather strategy for managing such risks,” she explained.

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