Joint Forum publishes recommendations on longevity risk transfer

The Joint Forum, a forum established to deal with issues common to the banking, securities and insurance sectors, has published its final report and recommendations to policymakers and supervisors on longevity risk transfer markets.

The Joint Forum, established by the Basel Committee on Banking Supervision (BCBS), the International Organization of Securities Commissions (IOSCO) and the International Association of Insurance Supervisors (IAIS), published a draft of the report in August and asked longevity risk transfer market participants to provide feedback and comments. The feedback has been considered and the report updated and published with recommendations now taking comments into account.

The Joint Forum believes that the longevity risk issue for pension funds is significant and as a result warrants a deeper look at the markets supervisory needs. With pension-related longevity risk exposure estimates ranging from $15 trillion to $25 trillion the market size is large and the supervisory needs equally larger, as pension funds are increasingly looking to transfer this risk.

Mr Thomas Schmitz-Lippert, Chairman of the Joint Forum and Executive Director, International Policy/Affairs of BaFin, the German Federal Financial Supervisory Authority, said; “The Joint Forum’s report on longevity risk will help global policymakers and supervisors remain ahead of the curve as this risk may amplify the interconnectedness of financial sectors and can lead to risk management challenges, systemic risks and stress.”

The Joint Forum’s set of recommendations to policymakers and supervisors are:

1. Communicate and cooperate: To reduce the potential for regulatory arbitrage, supervisors should communicate and cooperate internationally and cross-sectorally on longevity risk transfer.
2. Understand longevity risk exposures: Supervisors should seek to ensure that holders of longevity risk under their supervision have the appropriate knowledge, skills, expertise and information to manage it.
3. Assess relevant policies: To inform their policy towards longevity risk transfer markets, policymakers should review their explicit and implicit policies with regard to where longevity risk should reside. They should also be aware that social policies may have consequences for both longevity risk management practices and the functioning of longevity risk transfer markets.
4. Review longevity risk rules and regulations: Policymakers should review rules and regulations pertaining to the measurement, management and disclosure of longevity risk. This will help establish or maintain appropriately high qualitative and quantitative standards, including provisions and capital requirements for expected and unexpected increases in life expectancy.
5. Ensure adequate risk-bearing capacity: Policymakers should consider ensuring that institutions taking on longevity risk, including pension fund sponsors, are able to withstand unexpected, as well as expected, increases in life expectancy.
6. Monitor market developments: Policymakers should closely monitor the liquidity risk transfer taking place between corporates, banks, (re)insurers and the financial markets, including the amount and nature of the longevity risk transferred, and the interconnectedness this gives rise to.
7. Pay attention to tail risk: Supervisors should take into account that longevity swaps may expose the banking sector to longevity tail risk, possibly leading to risk transfer chain breakdowns.
8. Collect adequate data: Policymakers should support and foster the compilation and dissemination of more granular and up-to-date longevity and mortality data that are relevant for the valuations of pension and life insurance liabilities.

A number of issues around the treatment of longevity swaps in the report have been amended due to comments. The report gave the impression that longevity insurance provided more complete risk transfer than a longevity swap and that swaps held inherent counterparty risks. These important points have now been clarified with the removal of a paragraph. The report also now accounts for index-based longevity swaps through an added point.

The report says that as longevity risk transfer (LRT) markets are a relatively uncharted territory for analysts and academics as well as for supervisors. So the report aims to give a first and preliminary analysis of the size and structure of the LRT markets as well as the factors affecting their growth and development. It also seeks to raise awareness of the associated potential risks and cross-sectoral issues for market participants, policymakers and supervisors.

You can access a full copy of the Joint Forum report on its website.