Over £20bn of longevity hedges expected in 2016: Willis Towers Watson

Willis Towers Watson, the insurance and reinsurance broker and global professional services firm, says that it expects over £20 billion of longevity risk transfer and longevity swap or hedging deals in 2016, but with the year starting slowly.

Willis Towers Watson (WTW) notes that 2015 was relatively quiet, compared to 2014, for the pension de-risking market of bulk annuity and longevity hedging deals, but that appetite from pension funds picked up towards the end of the year.

In the last quarter of 2015, WTW said that over £5 billion of pension liabilities were transferred to or re/insurerd, either through longevity swaps and hedges or bulk annuity deals. Artemis has details of many longevity swaps, hedges and longevity reinsurance transactions in the Directory here.

In 2016, WTW expects that the year may start off relatively slowly for pension de-risking, but that the longevity risk transfer and bulk annuity market is expected to pick up in the Spring.

Shelly Beard, a senior consultant in Willis Towers Watson’s pension de-risking team, commented; “While most insurers spent much of 2015 preparing for Solvency II, final sign-off on reserving requirements was not provided by the Prudential Regulation Authority until December 2015. This means that as insurers start to submit responses to quotation processes in early 2016, there will inevitably be a period of price discovery for both pension schemes and insurers, as the market looks to understand how different players have been affected by the new reserving rules.

“Our current understanding is that, overall, there will be very little impact on buy-in pricing for pensioners, but pricing for non-pensioners could increase by up to 5%, although this will vary across insurers. However, we do not expect this to limit the growth of the market in 2016 as, to date, non-pensioners have only represented a small part of bulk annuities secured.”

WTW estimates that there will be more than £20 billion of pension liabilities exposed to aging cohorts transferred in longevity hedging deals in 2016.

That is for the UK market alone, we assume given the currency, as it is expected that longevity swaps and risk transfer will also remain popular in certain European countries and that interest in hedging longevity risk will also continue to grow in North America and Canada.

As we’ve written recently, longevity reinsurance capacity remains abundant with plenty of interest from traditional insurance and reinsurance firms to support longevity swaps and risk transfer deals.

Competitor Aon Hewitt said that it expects the longevity risk transfer market to be busy in 2016 as a result of the availability of capacity, growing demand for offloading longevity risk and also the influence of Solvency II driving this demand in Europe.

WTW explains that it does not expect Solvency II to lessen the appetite for providing longevity risk transfer and swap insurance or reinsurance capacity.

With the mechanisms to access sources of longevity risk transfer capacity becoming increasingly efficient, the costs and frictional effort required for pension funds to enter into deals is reducing. That, alongside the appetite of major re/insurers to enter into deals, should help to keep this market buoyant.

See details of many recent longevity swaps, longevity reinsurance and longevity risk transfer transactions in our directory of deals.