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£100Bn of reinsurance capacity available for longevity risk: Aon Hewitt


Aon Hewitt, the unit of insurance and reinsurance broker Aon which has a focus on retirement products, forecasts that £100 billion of reinsurance capacity will be available to support longevity risk transfer and longevity swaps over the next two years.

Aon Hewitt forecasts a significant uptick in the number of longevity swap and other risk transfer transactions in 2014 and 2015, with additional capital from the global reinsurance market available to support transactions capacity needs. As well as abundant capacity, better pricing is also set to stimulate more longevity swap deals, according to the broker.

From the global reinsurance market alone Aon Hewitt believes there will be £100 billion of new capacity available to the longevity risk transfer and pension risk solutions market in 2014 and 2015. This increased capacity is a result of a more mature market and follows a substantial year of deals in 2013.

Of course it is not just the reinsurance market that will have capacity available for longevity swaps and risk transfer in 2014 and 2015, the capital markets and third-party investors are also providing capital in some pension risk transfer deals linked to longevity. So the overall amount of capacity available could be much larger than £100 billion, if the transactions are structured in an appropriate way to enable capital market investors to access them.

Aon Hewitt, which led the advice on £8 billion of the £8.9 billion in deals completed during 2013, said that this is a reflection of a market which has developed and matured significantly in the last year. Back in 2009, when the longevity swap market started, there were only as many as six reinsurance companies willing to participate in these transactions. Aon Hewitt says that there are now 15 to 20 reinsurance companies which are active in the longevity risk space. The result is a deeper pool of capital available to support longevity risk deals, a larger and more competitive market which offers significant opportunity for a broader range of UK (and other) pension schemes.

Martin Bird, senior partner & head of Risk Settlement at Aon Hewitt, commented; “In the five years since Babcock International closed the first deal with Credit Suisse, the longevity swap market has evolved significantly and is now able to offer increased capacity and better pricing for UK pension schemes. Originally, these deals were regarded as only right for a very few schemes which were typically very large and usually with an industrial or manufacturing company sponsor.

“During 2013, we saw both the smallest and the biggest longevity swaps so far executed in the market, involving a greater range of schemes in terms of both nature and complexity. With an increase in reinsurance market participants who are willing to execute longevity swaps, a more competitive marketplace and a reduction in transaction lead times as market structures start to become more streamlined, we believe 2014 and 2015 will show significant growth. As schemes continue to gain a deeper understanding of their longevity risk exposures, we see an increasing appetite across a broader range of schemes to make use of the competitive reinsurance market capacity.”

Matt Wilmington, partner at Aon Hewitt, commented on the capital markets potential in the longevity market; “Capital markets remain an additional source of potential capacity in the future, but we believe it is unlikely to materialise in the next two years for several reasons. Primarily, the main challenge is the differing objectives and time horizons of institutional investors compared with pension schemes.  While significant tailored capacity is available from the reinsurance market, the capital markets will find it harder to compete.  However, this is not insurmountable and we expect to see continued innovation in this market in the coming years, leading to a broader capacity base and set of options for UK pension schemes.”

This is a very good point which may see the bulk of longevity deals going to reinsurers rather than third-party capital. However, as new innovations in longevity risk transfer enable investors to see a lower level of basis risk and more secondary liquidity opportunities, the capital markets will be set to provide more capacity to longevity risk transfer as well. So reinsurers are unlikely to have their own way for long.

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