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Longevity swap market forecast to be busy again in 2016: Aon Hewitt


The market for longevity swaps and risk transfer is forecast to be busy again in 2016, by Aon Hewitt, with a continued focus on bringing longevity reinsurance capacity more efficiently to smaller pension funds as well as larger deals.

Aon Hewitt, the pensions, benefits and investment consultancy arm of insurance and reinsurance broker and advisor Aon, forecasts that the high-levels of activity seen in the longevity risk transfer market are set to continue and that the market will continue to develop more efficient ways for pensions seeking to offload the risk of retirees living longer to sources of reinsurance capital.

With a growing desire to pass some of their longevity risk off to the re/insurance market, either in swaps, or as a carved out piece of a total pension risk transfer, the world’s pensions are becoming more aware of the significant risk that longer lives poses to them.

This has led to a continual stream of large deals in recent years, with many longevity swaps in the billions of pounds, dollars or euros. The life insurance and reinsurance sector has been soaking up the majority of this longevity risk, utilising it as a hedge with their mortality portfolios.

This trend is set to continue, as the insurers and reinsurers involved believe they can continue to assume longevity risks as long as they source mortality to counterbalance it. Of course the natural hedge has its doubters, so that’s an interesting dynamic to watch over time, but it does mean that there should be ample reinsurance capacity available for 2016 and beyond.

One of the trends seen in 2015 that is expected to accelerate in 2016, is the shift towards smaller longevity swaps. As the longevity risk transfer and reinsurance market has introduced more efficiency into its transactions, smaller pension schemes have been able to access the benefits of longevity risk transfer.

Insurers have also been utilising longevity swaps and reinsurance deals, to carve out some of the longevity risks from their annuity books. This is also expected to continue in 2016 and the efficiency being introduced will allow smaller insurers to benefit.

Insurers have also been working on an infrastructure that will allow them to pass on longevity risk from future annuity deals to the reinsurance market more directly. This should again ensure that the longevity risk pipeline continues to grow.

Aon Hewitt expects to see an “increased focus” on longevity risk transfer from pension schemes in 2016, as well as more progress being made on bringing longevity swaps and risk transfer to mid-sized pension schemes.

Smaller pensions are increasingly becoming aware of the longevity risk transfer market, which should increase deal-flow over time. Also, as pensions increasingly hedge financial risks, the burden of retained longevity risk will increase and again should increase the use of swaps and reinsurance to hedge it.

With 2015 having proven a busy year in the longevity swap market, Aon Hewitt counted £9.6 billion of deals by December and expects that to grow before year-end. In fact Aon Hewitt said that, “2015 is expected to be close to, if not in excess of, the bumper £22bn of transactions completed last year,” which may suggest a big deal is imminent.

“The financial appetite of the global reinsurance market remains strong and is expected to be even stronger in 2016,” Aon Hewitt explained. However, noting that expertise in reinsurance on longevity risks remains constrained but that reinsurers should boost their teams in 2016.

Other important developments in 2015 that will continue in 2016, include the ability to obtain longevity reinsurance protection for some of the “non-pensioners” in a bulk annuity transaction. Aon Hewitt notes that this trend is “an important development for the market’s future pricing.”

Aon Hewitt noted; “The availability of reinsurance market cover for the provider to pass on some of the longevity risk is a key factor for controlling price rises for non-pensioners.”

North America is expected to figure increasingly as well, after the first longevity swap in Canada in March 2015. Both Canada and the U.S. are starting to show similarities to the UK market, which could present a need for significant additional longevity reinsurance capacity in the years ahead.

The longevity swaps, risk transfer and reinsurance market has grown significantly over the last decade, as pensions sought to get to grips with their exposure to longer lives. As these trends continue the availability of capacity will also drive this market and at some point it is expected that capital market players will be able to get more involved in transactions that feature longevity indices.

See details of many recent longevity swaps, longevity reinsurance and longevity risk transfer transactions in our directory of deals.

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