Longevity reinsurance demand to rise on bulk annuities & Solvency II

Solvency II could increase demand for reinsurance capacity to back longevity risk transfer and longevity swaps, as insurers entering into bulk annuity pension risk transfer transactions find offloading the longevity risk can be more efficient.

The increasing desire to offload pension risk through bulk annuity transactions and other forms of risk transfer has been an ongoing trend in recent years, particularly for pension funds and providers looking to reduce exposure to final salary schemes.

The bulk annuity trend could also increase the demand for longevity swaps and reinsurance based risk transfer, as the insurers taking on the annuities are increasingly expected to look to hedge the longevity risk associated with them.

With the Solvency II regulations now in force, insurers entering into bulk annuities transactions have increasingly been entering into reinsurance arrangements to simultaneously transfer the longevity risk from the annuities to another party.

This will increase demand for longevity reinsurance or risk transfer capacity, as “insurers have found that efficient pricing is achieved by transferring the longevity element of a bulk annuity policy directly on to reinsurers,” according to actuarial service firm Barnett Waddingham.

Barnett Waddingham said in its latest report on large defined benefit pension schemes that it expects we will see at least £20 billion of longevity risk transfer transactions entered into in 2016.

Availability, pricing and options for longevity reinsurance, as well as how to access capacity through traditional or swap-like means, are set to become increasingly important now that Solvency II is in force, Barnett Waddingham said.

“An understanding of longevity reinsurance will be increasingly important to ensuring best pricing terms in a buy-in or buy-out deal,” the firm explained in its report.

And with innovation in the longevity swap market, in terms of innovative structural efficiencies that help smaller pensions and insurers access longevity reinsurance capacity “these deals will be more and more accessible to mid-sized pension schemes over the next few years,” Barnett Waddingham continued.

Meanwhile, Aon Hewitt said in its latest 2016 Risk Settlement Market report that it expects we will see “another record total of bulk annuity and longevity swap deals” this year.

The risk settlement market grew to more than £30 billion of transactions in 2015, compared with £22 billion in 2014 and Aon Hewitt believes that this growth trend will continue.

“New market entrants and existing providers will create greater capacity to offer competitive solutions for schemes of all sizes,” the firm explained.

Martin Bird, senior partner and head of the Risk Settlement Group at Aon Hewitt, commented; “We are confident that 2016 will again be a bumper year for the risk settlement market. While there was a sluggish start to the year mainly due to the introduction of Solvency II — with providers bedding down their internal modelling and working through its impact on settlement pricing — we believe that the new regulatory framework will continue to drive innovation as providers strive to remain competitive.”

So again, Solvency II is likely to drive interest, innovation and growth in demand for longevity risk transfer and reinsurance capacity going forwards. Aon Hewitt notes that the trickle down effect of innovation in large risk settlement and risk transfer deals in the pension and annuity space will result in greater access to risk capacity for smaller sponsors of transactions.

Aon Hewitt also noted that the bulk annuity risk transfer appetite is likely to stimulate greater need for longevity risk solutions and capacity.

“Longevity reinsurance might become a trend as few annuity providers are expected to bear all the risk created by increased capacity themselves,” Aon Hewitt commented.

So with Aon Hewitt expecting that 2016 will see a “record total of bulk annuity and longevity swap deals” and Barnett Waddingham agreeing and pushing for over £20 billion of longevity swaps, plus increased demand for longevity reinsurance, it will be interesting to see whether some of the excess capacity can be soaked up.

Traditional insurance and reinsurance markets have been dominating the longevity risk transfer market for some time, as some use it as a way to hedge their mortality risk while others simply see an opportunity to deploy excess capital.

That has led to lower participation of the capital markets in longevity deals, as transactions have in many cases been absorbed by the largest traditional markets. But increased need for capacity and a growing focus on offloading longevity risk of bulk annuities, could result in a growing requirement for capital markets participation in longevity risk transfer.

See our list of longevity swaps, risk transfer and reinsurance transactions.