Longevity swaps outpace bulk annuities in H1 2021: Aon


The market for longevity swaps has outpaced the use of bulk annuities, when it comes to pension risk transfer deals, through the first-half of 2021 and the second-half could also be busy as there is spare capacity in the market to be used, broker Aon notes.

Large longevity swap and bulk annuity deals have become standard forms of risk settlement and transfer for major pension funds around the world, enabling them to leverage insurance and reinsurance market appetite for exposure to longevity-related risks.

In the first-half of 2021, three large longevity swap transactions totalled almost UK £13 billion, as pension schemes continued to look to sources of reinsurance capital to reduce their exposure to pensioners living longer than anticipated.

On the bulk annuity side of this pension risk transfer market, only UK £7.7 billion of deals were done in H1 2021, according to Aon’s latest data.


It means the longevity swap market remains on-course to come close to 2020’s record UK £24 billion of publicised issuance and is already ahead of 2019’s UK £11.8 billion and 2018’s UK £4.7 billion.

“The last couple of years has shown that longevity swaps continue to be popular for pension schemes and their increased flexibility is attracting more mid- sized pension schemes to consider this as a risk settlement option,” Aon’s Risk Settlement team explained.

Longevity swaps are more flexible now in a number of ways, not least in the fact they can be converted in future to a full bulk annuity risk transfer deal.

But also of note is the fact that many longevity swaps are now transacted using a segregated cell or special purpose vehicle as an intermediary insurer, allowing pension schemes to more directly transact with sources of reinsurance capital.

Looking ahead, Aon noted, “It is also notable that swaps have been particularly attractive in the financial sector where sponsor capital considerations play an important role in decision making.

“Given the uncertainty of the impact of COVID-19 on long-term mortality, it is no surprise that more schemes are looking to hedge longevity risk.”

Aon said that spare capacity in the market is also going to be a driver of activity through the second-half, which is true given reinsurers are keen to take on more longevity risk and the number of annuity reinsurance capital providers growing all the time.

It’s also notable that bulk annuity providers are also looking to third-party capital sources now as well, leveraging institutional capital’s appetite for exposure to the asset side of these deals.

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

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