To tackle the issue of longevity risk, the risk of an increasingly ageing population and the impact that will have on pension liabilities, the re/insurance industry will need to work closely with both governments and capital markets. On its own the re/insurance industry does not have the capacity to assume the amount of longevity risk exposure that exists, so methods to transfer the risks to the capital markets, possibly via government assisted schemes, will be required.
That’s the conclusion that most re/insurers and industry experts have come to. In an article on Risk.net yesterday they say that a Swiss Re spokesperson stated that governments need to get involved in the longevity risk transfer market with the aim of helping to establish a market price for risk. If a market price were set, and government backed bonds introduced, it would help to speed up the process and acceptance of longevity hedging and longevity risk transfer to the capital markets.
The longevity risk problem is huge, with just the UK pension market said to contain £1 trillion of longevity risks.
The need for a partnership on the issue of longevity risk is clear. Re/insurers need help from governments and capital market institutions and at the same time governments need assistance in understanding how they could issued longevity bonds themselves. This has been attempted before in a World Bank pilot project in Chile but failed due to concerns over the basis risk of the bonds that were being proposed.
The issuance of longevity trend bonds by Kortis Capital recently may help to rekindle attempts to get governments involved or at the least may now open a private sector flood of longevity trend risk transfer.