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Don’t rule out more longevity swaps by year-end: Aon


The pension fund risk settlement market has  been up and down throughout 2020, as the pandemic related uncertainty has caused activity to fluctuate in the longevity swap, reinsurance and bulk annuity market. But Aon believes total volumes could still hit UK £50 billion this year.

Aon logoMore activity may be seen before the end of 2020, as pensions remain motivated to secure risk transfer and capital to support their funding levels.

While 2020 is cited as a “difficult” year by insurance and reinsurance broker Aon, it notes that, “The risk settlement market, including both bulk annuities and longevity swaps, could still reach £50 billion by the end of 2020 – while final volumes could yet make it a record year.”

Activity levels have fluctuated through the first three-quarters of the year, Aon’s Risk Settlement team explained.

But a late surge in deal activity is anticipated, as pension schemes look to take advantage of pricing in the insurance and reinsurance market to complete deals that transfer longevity risk, or full scheme funding risks, to others.

Mike Edwards, partner at Aon, explained, “Over £25 billion of transactions took place in the first half of this year, across both the bulk annuity and longevity swap markets. That’s clear evidence of the resilience of this market, of pension schemes’ need for these solutions and of the way that the market has developed in recent years.

“However, Q3 was busy for the market and we also know that significant insurer and reinsurer appetite remains for closing further transactions before the end of the year. Market timing has been a key theme throughout 2020 with very attractive pricing available to those schemes that have been ready to act.”

It’s not just the uncertainty related to the COVID-19 pandemic either, as other factors are also plaguing confidence in markets.

Edwards said, “Some of the inevitable market uncertainty driven by the US election and Brexit negotiations will mean that schemes will need to take a robust approach to get transactions over the line.”

Stephen Purves, partner at Aon, added, “The risk settlement market has never had challenges like it’s had in 2020. However, the resilience of the industry and its ability to quickly adapt to the challenges faced this year has meant that the momentum of transferring risk to insurers and reinsurers has continued at pace.

“It also shows that these kinds of insurance-based risk reduction exercises are no longer seen as special projects for pension schemes but something which they view both as achievable and as a priority. Schemes of all sizes are able to capture some fantastic pricing opportunities along the way.”

The longevity swap market has been a little slow throughout 2020, although some larger deals have helped to keep overall volumes relatively high.

However, reinsurance market conditions meant that pricing remained attractive through most of the year and major reinsurers managed to deploy more capital into longevity reinsurance deals and in support of other bulk arrangements.

It will be interesting to see how appetite is for large longevity swap or reinsurance deals through the end of this year and into 2021, as broader reinsurance market conditions continue to improve with rates hardening rapidly.

That could mean some reinsurers look for deployment of capacity elsewhere, but as ever the longevity and life related reinsurance market will prove an attractive diversifier for those multi-line players which should mean capacity for longevity swaps remains ample to satisfy pension scheme needs.

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

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