Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Longevity swap sponsors can halve deal costs with own re/insurers


Pension fund sponsors of longevity swaps can as much as halve the transaction costs by establishing their own special purpose insurance or captive vehicle, or using a service provider, in order to more directly access sources of longevity reinsurance capital.

In the past a longevity swap transaction typically saw the pension fund entering into an insurance swap agreement with a private market insurer or bank, followed by that insurer entering into a reinsurance agreement with a source of reinsurance capital. The recent trend which sees the pension funds establishing a special purpose re/insurer allowing them to bypass the need to engage a private insurer in the deal has made a real difference to the costs borne by the pension fund sponsor.

The first longevity swap and reinsurance transaction that saw a pension fund sponsor establish its own insurance vehicle was the £16 billion BT pension scheme longevity swap in July 2014.

Just last week the UK’s Merchant Navy Officers Pension Fund (MNOPF) completed a direct longevity hedge or swap transaction, using the recently established Longevity Direct platform that was launched last year by Towers Watson. The facility makes it even easier for longevity swap sponsors, as Towers Watson provides them with a segregated cell of its Guernsey based insurance vehicle which the pension fund can use for the swap transaction.

It’s clear that by cutting out a middle-man insurance firm the sponsor of the longevity hedge transaction can make a saving. However it’s now become clear just how much of a saving can be made, after the MNOPF told Pensions Expert that it saved £10m on the transaction costs by using this new, more direct approach to a longevity swap.

Gaining direct access to the reinsurance market in this way allowed the MNOPF to recognise this saving, which it believes amounts to around half the total cost of the transaction.

Andrew Waring, chief executive of the MNOPF, said; “It could quite easily have cost us £20m or so to go through the traditional route to pass the risk away. This structure is significantly less than half of that.”

For smaller pension funds this route, of cutting out the middle-man or insurer, will definitely be an attractive option. It does come with certain responsibilities though, such as operating the insurance vehicle over the life the deal. Here a platform like Towers Watson’s Longevity Direct will be particularly attractive to potential deal sponsors.

The use of platforms for issuing transactions will likely grow as well and we’d expect other deal structurers and facilitators to launch their own platforms in the future. Much like the cat bond lite platforms that we often cover, the efficiency and lower-cost of issuing transactions will be attractive for firms seeking to offload their longevity risks.

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