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Original Risk: A Society for Change Agents

2016 a testing period for longevity swap market: Aon Hewitt


Last year was a testing one for the market in longevity swaps, as both pensions and reinsurance markets reacted to changes in mortality expectations driven by new data, creating market uncertainty, Aon Hewitt said.

2016 saw slower activity as a result of this uncertainty, although it was by no means a barren year for longevity swaps and longevity reinsurance transactions, as transactions between insurers and reinsurers continued apace, despite some slowing in direct swaps from pension schemes. In fact Artemis recorded somewhere north of £5 billion of transaction volume just in longevity swaps and reinsurance in 2016.

The longevity swap market has continued to evolve, despite its challenges, and Aon Hewitt notes a broadening in the range of deal structures seen and a substantial number of smaller deals now able to be completed.

The issue the market faced in 2016 is explained by Aon Hewitt as; “Longevity pricing has been going through a period of reaction in light of the heavier than expected recent experience of deaths and resulting review of longevity expectations.”

We’ve written about this in more detail here and here, both based on insight from Aon Hewitt.

“This created uncertainty in the market, as insurers, reinsurers and pension schemes separately reconsidered what would now represent an attractive price,” Aon Hewitt explained.

This sticking point of uncertainty for the longevity risk transfer market may disappear, as the market adjusts its expectations, risk models and pricing evolves accordingly to allow pensions to access longevity insurance and reinsurance capacity in greater volume.

“Updated longevity analysis is now becoming available to help the market,” Aon Hewitt notes, which should help to alleviate the blocker seen in 2016.

2017 has already seen a couple of transactions, but activity does remain slow. However pension risk transfer market participants suggest that there remains significant interest in hedging among UK and other nationality pension schemes, suggesting that as soon as the market’s price expectations stabilise we could see more deal-flow emerging.

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

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