Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Longevity swaps continue to evolve: Aon Hewitt


For pension schemes around the world looking to offload their longevity risks, the good news is that the longevity swap structure continues to evolve and options for longevity hedging continue to open up to a wider range of pensions.

With reinsurance capital remaining abundant the options for transferring longevity risks away from a defined benefit pension plan are increasing, which has been helped both by structural changes as well as the appetite of large reinsurers to assume the risk.

The capital markets has not really had a look-in, in recent years, at the majority of longevity swap transactions, although we understand that some ILS fund managers continue to participate in a small way in the longevity reinsurance market (when transactions are available) as part of their life ILS strategies.

Aon Hewitt explains that UK pension schemes continue to show a strong desire to transfer risk and that in 2017 opportunities to de-risk are expected to continue to grow.

“Methods of hedging longevity risk through use of a swap also continue to evolve,” Aon Hewitt explains.

“A variety of structural options are now available for larger schemes seeking to hedge longevity risk,” the consultant continued.

But longevity swaps are no longer solely the domain of the large pension funds, and smaller schemes are now readily able to access sources of risk and reinsurance capital by using the efficient longevity swap platforms established by some intermediaries.

As Aon Hewitt explains; “Recent transactions between Zurich, Pacific Life and SCOR provide evidence that longevity hedging is viable for smaller schemes, through removal of some of the structural and management complexity associated with larger transactions.”

The prevalence and low-cost of reinsurance capital, as well as the strong desire to dominate this market as it provides a natural hedge to their mortality risks, continues to ensure that the world’s largest reinsurance companies are the beneficiaries of most longevity risk transfer.

Continued evolution of the longevity swap structure and product will benefit pensions and help bring longevity risk transfer options to an increasing number of them, but without a drain on reinsurer capital it seems the promise of liquid capital markets trading in longevity risk seem a distant memory (for now).

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

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