Life insurers expected to get more involved in pension fund longevity risk transfer

Fitch Ratings says in a press release that UK life insurers are expected to increase their pension exposure from corporates looking to offload pension fund risks including longevity. There is an opportunity for life insurers to grow their business by participating in pension risk transfer with one of the main areas of potential growth in insuring longevity risks, or the risks of pensioners living longer.

Fitch Ratings note that many of the larger longevity risk transfer transactions have been enacted as longevity swaps which allows banks to compete directly with insurers on transferring these risks. The bank facilitated longevity swaps tend to involve capital markets capacity and is the area of the longevity market which has seen the most headlines and growth in the last few years.

Fitch believe that life insurers will get more of an opportunity to participate in underwriting this growing sector of pension risk transfer in the future as average deal size shrinks and pricing becomes more uniform.

Of course, no matter how the initial longevity risk transfer is transacted, whether a longevity swap to capital markets investors or a longevity re/insurance deal where a re/insurer underwrites the risk directly, there are still growing concentrations of longevity risk to be dealt with.

For life insurers, longevity risk can act as a natural hedge for mortality risk to some degree, but life insurers who underwrite increasingly large amounts of longevity are going to need to transfer at least some of that risk on to another party. Reinsurance cover will be required for those longevity risks and this is where the capital markets via instruments such as longevity swaps, longevity risk securitization and index-linked risk transfers will continue to play a growing role in the pension risk transfer market.