Pension Insurance Corp. acquires £1.4 billion of longevity reinsurance

Pension Insurance Corporation (PIC), a specialist provider of insurance and risk transfer solutions for defined benefit pension funds, announced today that it has recently acquired reinsurance to cover £1.4 billion of its own longevity exposure.

As one of the largest players in the dedicated pension insurance and pension risk transfer space, PIC assumes large amounts of exposure to longevity risks of the pension funds it provides its risk transfer and insurance services to. As a result it needs to manage its own longevity risks and this year has chosen to do so through a number of longevity reinsurance transactions.

The longevity reinsurance transactions are with global reinsurers, including around £1.1 billion of reinsurance protection sourced from Reinsurance Group of America (RGA). In total PIC has now reinsured over £5 billion of its longevity risks in the global reinsurance market, which it says shows its commitment to a stable balance sheet with low exposure to life expectancy increases.

Rob Sewell, Chief Financial Officer at PIC commented; “2013 has been a very successful year for PIC, having insured more than £3 billion of pension scheme liabilities. We are delighted with this record year, but also pleased to have been able to efficiently manage our exposure to longevity risk. For each year that life expectancy exceeds predictions, liabilities increase by about 3%. We will continue to manage our exposure to longevity risk to help ensure that our policyholders’ pensions remain secure for the long-term.”

Pension schemes are exposed to the risks that their members live longer than expected, meaning that pension payments continue beyond original forecasts. When PIC enters into a deal to insure or take on risk from a pension scheme it naturally assumes some level of longevity risk and currently chooses to offload some of that longevity exposure to the reinsurance market. PIC notes that reinsurers may be better able to hold longevity risk due to its natural hedge with mortality risk that they may already hold.

Efforts are still underway to try to stimulate a liquid capital market in longevity risk, enabling third-party capital to participate in the market more regularly. Most recently Deutsche Bank launched a new longevity risk transfer instrument, which it calls the Longevity Experience Option (LEO), and hopes to see the first option trade before the end of the year. Pension Insurance Corporation will certainly be a candidate for using any longevity risk transfer instruments which gain traction in the market.