What is longevity risk transfer?

Longevity risk refers to the risk of the members of a pension plan or policy holders of certain annuities and life policies living longer than expected. With life spans lengthening, due to improved medical care, breakthroughs in disease control and prevention, healthier lifestyles etc, some pension funds, insurers and reinsurers find their exposure to longevity risk growing. Therefore the the risk of paying out on pensions and annuities for longer than anticipated is increasing.

As a result, longevity risk is often transferred between parties, either as insurance, reinsurance, a swap or other capital market hedge. Often the longevity risk is transferred to global reinsurers large enough to absorb the risk, using it as an offsetting hedge for their mortality risk portfolios, but in some cases the risk is transferred to the capital markets too.

Longevity reinsurance is the most common form of longevity risk transfer covered on Artemis, closely followed by the growing market in longevity swaps.

There are other efforts underway to create capital markets instruments and structures which can be used to transfer longevity risks to capital market investors as well as reinsurers. However a lack of liquidity in secondary markets is a factor which has been holding back the development of this technique.

Longevity risk transfer has also been achieved using securitization, with the Kortis Capital Ltd. transaction from reinsurer Swiss Re a famous example of using a catastrophe bond type structure to transfer longevity risk to the capital markets.

The amount of longevity risk held by pension plans and funds around the world is growing as life expectancies lengthen. As a result it is widely assumed that at some point the capital markets will be required as a destination for longevity risk to be transferred to, as reinsurers become too concentrated and need somewhere to lay off this risk to as well.

View a list of all the major longevity swap, risk transfer and reinsurance transactions.

Keep up with the latest longevity risk transfer news on Artemis.

Jardine Lloyd Thompson Capital Markets