Pension Insurance Corporation (PIC), one of the largest insurers of pension plan longevity risks and as a result a firm who assume large amounts of longevity risks themselves, has offloaded £300m of longevity risks by hedging them through a reinsurance agreement with Munich Re. The transaction see’s Munich Re take on £300m of liabilities and longevity risk from PIC allowing them to free up capital so they can continue to underwrite directly with pension plans.
This is further evidence of the longevity risk transfer pipeline, which we often write about, as companies like PIC assume pension liabilities and longevity risks and need to pass that on to another party so they don’t become over exposed to longevity and can continue to take on new business. Reinsurers are just one source of risk transfer for longevity and pension exposure with the capital markets being another source through instruments such as longevity swaps and longevity risk securitization. Of course the risk of concentration of longevity risks is passed on down the line and at some point global reinsurers who assume longevity risks will need a market to transfer it to themselves, hence the various work efforts to develop markets in longevity risk.
Pension Insurance Corporation have been a regular user of the reinsurance markets to pass on longevity exposure and free up working capital. To date they have reinsured as much as £3.5 billion, around 65%, of their total exposure to pension plan risk including longevity. Back in January 2011 they reinsured £500m of longevity risk with a number of global reinsurers.
Rob Sewell, Chief Financial Officer at Pension Insurance Corporation, said; “Our strong new business performance so far this year demonstrates the very high demand for defined benefit pension insurance solutions, even against a difficult macro-economic environment. It is vital that we maintain our focus on securing our existing policyholders’ pensions for the long-term and this reinsurance transaction helps to further protect us against the very long-dated risks we face. We are delighted to have been able to work with Munich Re on the transaction.”
Pension Insurance Corporation say they have written approximately £1.1 billion of new business so far in 2012.