Longevity reinsurance pricing back in synch after period of dislocation: Aon

Longevity reinsurance pricing is now back in synch following a period of dislocation as new mortality data continues to feed through into pricing, according to insurance and reinsurance broker, Aon.

Throughout 2016 and during the first six months of this year, changes in mortality expectations saw both pensions and reinsurance markets challenged. Heavier than expected mortality rates in the UK, which took time to be realised by reinsurers, led to a price dislocation in the market, says Aon.

Senior Partner and Head of Aon Hewitt’s Risks Settlement Group, Martin Bird, said; “Longevity reinsurers took their time to recognise the emergence of a heavier-than-expected UK mortality experience – and that caused a price dislocation in the UK longevity reinsurance market. This came to a head in mid-2016, when we advised schemes that were seeking to mitigate their longevity risk to look at re-pricing or even to defer their longevity transactions altogether. We believed they needed to wait for reinsurers to recognise the emerging data.

“Thankfully the market has now effectively ‘re-located’ and the strike price for a typical longevity swap has reduced significantly. We believe that pricing is back in synch and that dislocation is no longer a major concern. In the last quarter of 2016, reinsurance pricing levels for the UK pension risk transfer market showed that pension schemes which chose to delay longevity risk transfer or swap deals, were seeing price reductions of up to 2%. Similarly, during the first half of 2017, a similar pattern has emerged as the reinsurance market has continued to react to the latest data and changed its pricing accordingly.”

Aon warned earlier in 2017 that longevity reinsurance pricing may have been overpriced in 2016, and subsequently urged pension schemes to be wary of and analyze the latest mortality data.

New mortality data can take time to be included in pricing models, which resulted in the pricing dislocation witnessed in 2016 and in the early months of 2017. However, Aon now feels that as at the half-way point of 2017, longevity reinsurance pricing is “back in synch,” which could mean a significant year for longevity hedging.

Tim Gordon, Partner and Head of Longevity at Aon Hewitt, said; “The weekly deaths data published by the UK Office for National Statistics confirms that the mortality experienced in England & Wales continues to be significantly higher than had been expected five years ago.

“The debate over whether recent mortality experience is a blip or a genuine trend appears therefore to have been settled. We now have a more tempered and nuanced industry-wide discussion that, in addition to taking account of the emerging national data, is also updating its thinking on the underlying drivers of future mortality improvement and how these will impact pension scheme liabilities.”

Bird, continued; “This wider industry consensus forming around future mortality improvements is very welcome. The significant restoration of correct pricing in the longevity market compared with 12 months ago is also an extremely positive development. However, prospective purchasers of longevity risk protection should still take steps to ensure that the pricing they receive is fully up-to-date and competitive.”

Ultimately, reinsurance pricing drives the price for longevity insurance via longevity swaps and similar, and with pricing now believed to back in synch it will be interesting to see how active the longevity risk transfer market is through the remainder of 2017, and into 2018.

Read about many historical longevity swap and reinsurance transactions in our Longevity Risk Transfer Deal Directory.

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