The capital markets and its investors can plug any gaps in longevity reinsurance or risk transfer capacity should demand for longevity hedging rise, with index-based longevity hedging likely to become a focus should that need arise, according to Hymans Robertson.
There remains significant reinsurance capacity available to soak up global pension fund longevity risk at the volumes that currently come to market, meaning the capital markets and insurance-linked securities (ILS) investors or funds can often find sourcing a share of this longevity risk transfer activity difficult.
Hymans Robertson believes that there remains plenty of untapped insurance and reinsurance capacity for longevity risk, however global market dynamics could lead to a requirement for the capital markets to assist.
Around 70% of reinsurance firms have a preference for non-UK longevity risk, with U.S. longevity risk likely to be the most in demand because of reinsurers significant U.S. mortality exposure.
For that reason, should the U.S. market for pension longevity risk transfer take off it is possible that capacity for UK deals could wane, leaving an opportunity for the capital markets to provide support.
“We do see scope for the capital markets to serve as an additional source of longevity hedging capacity, which ought to be able to help plug any deficit should North American pension plans or insurers suddenly develop an appetite for longevity de-risking,” Hymans Robertson explained.
Adding, “In this scenario we would also expect further acceleration of the development of longevity hedge indices to support more readily tradeable instruments to help draw in capital and deliver capacity.”
However, so far these innovations remain relatively untested, the consultant notes, but the premise is sound as ILS funds and capital market investors have bought into index-based longevity swaps and risk transfer deals before.
For ILS fund managers with life ILS investment strategies, the availability of more options to invest in longevity risk and reinsurance would be welcomed, helping them to grow the size of their life ILS funds.
Hymans Robertson believes that the insurance and reinsurance industry as a whole can accommodate a massive £2.3 trillion of global pension longevity risk, but dynamics are likely to insist on participation from the capital markets to make a market in this risk more fluid and also sustainable.
Here, innovation is going to be key and even the largest global reinsurance firms are likely to utilise the capital markets to assist them in expanding their risk appetite for longevity deals.
Of course we’ve been here before and the discussion of an increase in longevity risk transfer to the capital markets is a perennial one. But with such an enormous potential risk pool continuing to grow, the participation of ILS markets in hedging longevity risk is likely to increase steadily over time.
Read about numerous historical longevity swap and reinsurance transactions, in our Longevity Risk Transfer Deal Directory.