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Pent-up demand could lead to record longevity hedging in 2018: Aon


Pent-up demand for longevity risk transfer among pension schemes could make 2018 a record year for longevity swaps and reinsurance transactions, now that pricing has caught up with the latest data on mortality trends, according to Aon.

The longevity swap and risk transfer market suffered a bit of a slow-down through 2016 and 2017, as the market faced a dislocation due to pricing uncertainty for longevity reinsurance capacity, as the market reacted to recent higher rates in mortality.

Now, the reinsurance market has come to terms with the new mortality rates and these are factored into pricing, making longevity risk transfer more available and now pricing is considered accessible for pensions once again.

As a result 2018 may see a resurgence of this market, with more transactions expected to be completed than in the previous year.

Martin Bird, senior partner and head of risk settlement at Aon, commented, “We expect a busy year in the longevity markets during 2018 with schemes and sponsors continuing to explore both sizing and structuring of longevity deals. We have seen a period of significant change, as the market has reacted to the recent higher rates of mortality.

“It is no longer seriously disputed that we have entered a phase of low national mortality improvement. Longevity insurers and reinsurers were initially – and understandably – reluctant to recognise this in their pricing. It led to a dislocation in market pricing during 2016 and early 2017, with pricing materially lagging best estimates. However, this has now changed and reinsurance pricing is again looking attractive to pension schemes.”

As a result the expectation is that pension schemes will be looking for risk transfer again this year and Aon gives an idea of the levels of demand it’s seeing, as it says that around 20% of its pension fund clients are looking to some form of risk transfer arrangement, including longevity swaps and risk transfer.

“Longevity reinsurance pricing has returned to more attractive levels following the period of dislocation during 2016 and early 2017 and we are already seeing schemes re-entering the market to purchase protection against this risk,” Bird confirmed.

The change in market outlook was becoming evident in late 2017, as a number of longevity swap and reinsurance deals came to market towards the end of the year.

“Longevity swap activity by UK pension schemes picked up markedly towards the end of 2017, with a number of completed transactions ranging from £300m to £3.4bn in size. With longevity risk hedged for a total of £6.4bn of liabilities during the year (based on deals announced), this was still an almost threefold increase on 2016,” Bird said.

However Aon also warns that unprepared pensions may find accessing longevity risk transfer capacity more difficult in 2018, as the market is expected to be so busy.

In fact, Aon explained that it has already completed one £2 billion longevity swap transaction for a UK client in March this year, but notes that it cannot disclose who the deal was for at this time.

Looking ahead, the focus on pricing means that now pension schemes can proceed with their longevity risk transfer plans safe in the knowledge that reinsurance will be priced in such a way that it more fairly reflects the underlying risks,  up-to-date information and mortality trends, Aon notes.

So with pensions that stalled their approaches to the longevity risk transfer market, as well as continued longevity reinsurance needs of insurers, Aon expects that the year ahead could see bumper levels of activity.

“There is pent-up demand from a number of pension schemes who paused the longevity broking processes when it became clear that reinsurance pricing was lagging behind on the most up-to-date information during the second half of 2016 and the first half of 2017. There also continues to be strong demand from UK insurers to hedge the longevity risk relating to both new bulk annuity business and existing back-book exposures (driven by the implications of the Solvency II capital regime),” Aon explained in its latest risk settlement market report.

Concluding, “All of this means that 2018 could be one of the busiest years to date for the longevity hedging market!”

Aon said that it considers current longevity reinsurance capacity pricing as “broadly fair in historical terms” which suggests that market activity will not be held back this year, as it has in recent times.

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

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