Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Enhanced supervision proposed for longevity risk transfers


A consultation document on longevity risk transfers has been published by the Joint Forum, a forum established by the Basel Committee on Banking Supervision (BCBS), the International Organization of Securities Commissions (IOSCO) and the International Association of Insurance Supervisors (IAIS) to deal with issues common to the banking, securities and insurance sectors.

The consultation document aims to provide a comprehensive picture of the longevity risk transfer market as it is today, investigate the reasons and incentives that drive insurers, reinsurers, pension funds, banks and investors to participate in longevity risk transfer markets and to assess potential risks and cross-sectoral issues that may arise.

The report looks at the linkages between and across firms involved in longevity risk transfer and investigates the potential for a breakdown of the risk transfer chains under stressed longevity scenarios. It also addresses issues of systemic risk and makes certain proposals for avoiding future risks and issues as the longevity risk transfer market grows.

The fact that the longevity risk transfer market is receiving this attention is testament to the potential size it could grow to. Longevity risk, or the risk of paying out on pensions and annuities for longer than expected due to an aging population, is significant when you look at the amount of capital or assets at risk. Estimates of the total global amount of annuity and pension-related longevity risk exposure range from $15 trillion to $25 trillion.

Because of this, pension funds have increasingly been looking at ways that they can offload, insurer or hedge this exposure. The global insurance and reinsurance markets are not sufficiently large to facilitate risk transfer of longevity for all global pension funds, hence it has always been thought that the capital markets and third-party investors would be required to make a market in longevity risk viable.

The Joint Forum has published its report to try to draw attention to the longevity risk transfer market, the increasing importance of this issue, to help supervisors and regulators to set appropriate policies to ensure effective supervision of the longevity risk transfer market.

Mr Thomas Schmitz-Lippert, Chairman of the Joint Forum and Executive Director, International Policy/Affairs of BaFin, the German Federal Financial Supervisory Authority, commented; “By focusing today on the risks and issues related to emerging longevity risk transfer markets, the Joint Forum is helping global policymakers and supervisors remain ahead of the curve as these markets continue to grow.”

The report makes the following recommendations to policymakers and supervisors:

  1. Supervisors should communicate and cooperate on longevity risk transfer (LRT) internationally and cross-sectorally in order to reduce the potential for regulatory arbitrage.
  2. Supervisors should seek to ensure that holders of longevity risk under their supervision have the appropriate knowledge, skills, expertise and information to manage it.
  3. Policymakers should review their explicit and implicit policies with regards to where longevity risk should reside to inform their policy towards LRT markets. They should also be aware that social policies may have consequences on both longevity risk management practices and the functioning of LRT markets.
  4. Policymakers should review rules and regulations pertaining to the measurement, management and disclosure of longevity risk with the objective of establishing or maintaining appropriately high qualitative and quantitative standards, including provisions and capital requirements for expected and unexpected increases in life expectancy.
  5. Policymakers should consider ensuring that institutions taking on longevity risk, including pension fund sponsors, are able to withstand unexpected, as well as expected, increases in life expectancy.
  6. Policymakers should closely monitor the LRT taking place between corporates, banks, (re)insurers and the financial markets, including the amount and nature of the longevity risk transferred, and the interconnectedness this gives rise to.
  7. Supervisors should take into account that longevity swaps may expose the banking sector to longevity tail risk, possibly leading to risk transfer chain breakdowns.
  8. Policymakers should support and foster the compilation and dissemination of more granular and up-to-date longevity and mortality data that are relevant for the valuations of pension and life insurance liabilities.

The consultation document itself provides a really good primer to the longevity risk transfer market, including transactions undertaken to date, details on different methods of risk transfer as well as on initiative to create liquid markets in index-based longevity risks.

Enhanced supervision of longevity risk transfer and any resulting markets that emerg is no bad thing as long as market participants, and potential future participants, ensure that their voices are heard in the regulatory process.

Any firms with an interest in longevity risk transfer as a tool for hedging or as a potential market to get involved in should read the report and provide any comments by the 18th October. You can access the full report and find details on how to respond here.

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