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New mortality data could mean “significant year” for longevity hedging: Aon


As new mortality data feeds through into longevity insurance and reinsurance market pricing, Aon Hewitt says it sees promising signs that once pricing is absorbed and ready for clients to use it could result in a “significant year” for longevity risk transfer in 2017.

The release of new mortality data put the market for pension longevity swaps almost on hold in recent months, as the signs of a pricing disconnect between pensions new understanding of their longevity risk and the reinsurance market’s legacy pricing stalled transaction activity.

But now the new data is being fed through into pricing and could result in longevity risk transfer, through swaps reinsurance and other hedging instruments, becoming more attractive once again.

Martin Bird, senior partner and head of Risk Settlement at Aon Hewitt, commented that in the longevity risk transfer market; “New mortality data and low gilt yields presented pricing challenges for schemes looking to transfer risk.”

But there are promising signs, Bird continued; “New mortality data is also feeding through to pricing which may mean a significant 12 months for the longevity market too. As ever, it’s a case of watch this space.”

Mortality rate chart data

Cumulative deaths in England and Wales by week compared with average over 2005 to 2014

With the longevity risk transfer market now open to smaller transactions, making longevity swaps more accessible to smaller pension schemes, there are many potential hedgers looking to come to market at the first sign that rates improve.

“Overall, it is clear that there is scope for growth in 2017 based on UK pension scheme and insurer demand and capacity for risk transfer,” Aon Hewitt explains.

How much activity we could see will depend on “The speed and extent to which reinsurers are able to more fully reflect the observable trend in mortality improvements in their pricing.”

Aon Hewitt continued; “The good news is that we have already seen significant movement in improvement assumptions from reinsurers on ongoing transactions.”

But while the pricing environment for longevity swaps, insurance and reinsurance looks set to improve, from the hedgers point of view, Bird explained that its vital to be ready to go to market.

“One aspect that remains unchanged is the need for schemes to be prepared to move when the moment – and therefore the pricing – is right,” he said.

It’s vital to know your options, understand your risk and assess pricing in the longevity risk transfer and reinsurance market, and if all that feeds through into a realisation that pricing adjustments are commensurate with the new view of risk based on the latest mortality data, then we could see an uptick in longevity swaps and risk transfer later in 2017.

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