Longevity risk transfer pricing at historical low: Kessler, Prudential


The cost of entering into longevity risk transfer and reinsurance arrangements is at a historical low, according to Amy Kessler, Head of Longevity Risk Transfer at Prudential Financial, as lower-than-expected longevity improvements feed through into the cost of capacity.

The reduced cost of longevity risk transfer means that now is an opportune time for pension schemes to transfer their longevity risk to the reinsurance market and with mechanisms to do so having become more efficient as well, there are significant efficiencies to be gained from locking in protection against pension plan cohorts living longer than expected.

Kessler explained that in the UK longevity expectations have dropped.

“Predictions for improvements in U.K. longevity have slowed dramatically over the past five years for most segments of the population, resulting in lower prices for hedging longevity risk,” she explained.

However, differences in longevity trend development across socio-economic groups are “significant” Kessler said, meaning that longevity risk transfer solutions should be tailored to suit the cohort.

But because of the drop in longevity expectations the price of insurance and reinsurance capital required to soak up longevity risks has declined.

Kessler continued, “Projection models used for pricing assume that lower levels of improvements will persist in the near term. Because of this, the present environment represents an opportunity for pensions to transfer longevity risk using these assumptions that are more favorable than in the past.”

Looking further heard there remains considerable uncertainty with regard to future longevity improvements though, as “Longevity improvement projection models in use in the market are not a crystal ball,” she explained.

Kessler urges pensions to look into transferring their longevity risks now, rather than holding on and hoping for even better pricing to emerge.

“Pensions that decide to keep their risk rather than hedge it—hoping for even lower costs—are maintaining a risky strategy. Pension schemes that maintain a high-risk position will need to manage the continuing volatility of markets, interest rates and currency fluctuations, which are compounded by longevity risk. Pension risk transfer is an all-weather strategy for managing such risks,” Kessler explained.

Kessler also highlights the structural innovations in the longevity risk transfer markets that have helped pensions to more directly access the reinsurance capacity they need to offload longevity risk to.

“In establishing a captive insurer, the pension fund now has a risk-mitigation option that makes longevity risk transfer scalable, repeatable, cost effective and efficient. We expect trustees of other large and sophisticated pension schemes to consider such captive structures as proven and effective ways to de-risk their plans while taking full advantage of their scale,” she said.

Looking ahead, Kessler expects that, “Flexibility combined with lower prices and increasing simplification and standardization of these transactions will lead to continued growth in this market segment.”

Kessler also said that the longevity hedging we’ve seen in the UK predominantly, in terms of longevity swaps and reinsurance deals, is gaining acceptance globally and she expects a gradual expansion of the longevity risk transfer market as a result.

“Moves to de-risk pensions have become an expectation among shareholders and key stakeholders in companies across the globe. In every industry, companies are increasingly choosing to shed longevity risk embedded in their pensions through buy-ins, buy-outs and longevity hedging, and there is growing acceptance of longevity risk transfer beyond the U.K.,” Kessler explained.

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

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