Availability of reinsurance capacity and access to it is increasingly important in a longevity risk transfer market, where pension and insurer appetite to offload longevity risks keeps increasing, but reinsurance capacity and pricing can sometimes be constrained.
The availability of longevity reinsurance has become key to the pricing of annuity transactions, as insurers offering these bulk annuity, pension buy-in or buy-out transactions typically look for simultaneous access to large pools of reinsurance capacity to manage the longevity risk inherent in the deals.
In a recent report, Richard Wellard, Partner and Risk Transfer Specialist at Hymans Robertson, said that he’s seeing an increasing appetite for longevity risk right now.
“There are a number of reinsurers that are closely monitoring the UK longevity risk market and considering offering longevity risk cover, either on a standalone basis or to insurers completing bulk annuity transactions,” Wellard said.
This is seen as positive, as any influx of capacity could help to keep pricing keen and help to support the pension risk transfer deal flow.
Wellard explained; “An increase in the number of global reinsurers taking on UK longevity risk could support an increase in transaction volumes and help pricing remain attractive.”
But at times the availability of longevity reinsurance capacity has been constrained, due to market factors, the inability of reinsurers to always move as fast as an insurer wants, or due to changes in mortality assumptions as we’ve seen recently.
With the introduction of Solvency II it became vital that insurers taking on pension risks could offload their longevity risk as soon as possible, so as not to affect capital ratios negatively.
Hence back to back longevity swaps and reinsurance arrangements have become more prevalent.
Hymans Robertson explained; “Insurers have also been establishing reinsurance relationships to ensure that they can implement “back-to-back” reinsurance arrangements to cover any longevity risks from inception.”
As a result, the majority of insurers have adjusted their longevity reinsurance strategies to offload a significant proportion of the new longevity risk that they take on, in the wake of Solvency II.
The availability of reinsurance has therefore been key in maintaining the flow of pension risk transfer deals, as it helps insurers to manage risk, capital and to offer competitive pricing.
Reinsurers have been adjusting to this reality, improving their ability to provide quotes more quickly, sometimes even at the same time as the pension risk transfer is priced. This is a clear reaction to the demands of the UK pension risk transfer market, and has helped it to grow thanks to the availability of reinsurance capacity.
Ongoing access to this longevity reinsurance capacity will be key in keeping pension risk transfer pricing keen, Hymans Robertson notes, driven both by the relationships insurers have, but also by the ability and appetite of reinsurers to continue to write more longevity risk.
Hymans Robertson believes that reinsurers have the ability to take on a significant amount of longevity risk, given they are typically much more exposed to mortality than longevity impacts.
In fact, the consultants say that, “At the current rate at which reinsurers expect to add new business, it’s highly unlikely that the financial capacity for reinsurers to keep writing longevity cover will be exhausted in the foreseeable future.”
Reinsurers are looking to develop longevity reinsurance portfolios in other countries now, as the UK has become highly competitive and opportunities abroad could be profitable as a result.
“As other countries start to catch up with the UK in terms of the volumes of longevity risk transferred, the availability of longevity reinsurance for the UK may decrease,” according to Kieran Mistry, Risk Transfer Specialist at Hymans Robertson.
The global expansion of reinsurers longevity portfolios could actually result in increasing prices as well, Mistry said; “All else being equal, the price of hedging longevity risk is likely to increase with increased global demand.”
Reinsurance firms also hold much of the influence in the pension buy-in market now, as the availability of their capacity is key to insurers ability to complete the transaction.
Mistry explained; “The fact that most insurers will seek to pass the longevity risk from a buy-in on to the reinsurance market at the outset of the transaction means that the views of reinsurers are now more important in determining whether a buy-in can go ahead and at what price.”
Hymans Robertson note an interesting trend, that reinsurers are not yet marketing the price of their longevity capacity directly to pension funds, despite the fact that their capacity is key to getting any pension risk transfer transaction done.
This could change in future, particularly as large reinsurers look to also take on some of the asset risk as well and so offer a one-stop solution taking some of the insurers further out of the equation and use intermediation facilities such as special purpose insurance vehicles in offshore domiciles.
As a result, the availability of reinsurance capacity is likely to become increasingly key and insurers could find themselves increasingly marginalised as reinsurers facing pressure elsewhere in their businesses look to capitalise on their important role in longevity risk and pension risk transfer.
Does this leave any room for the capital markets to play a role?
It could. Some reinsurers may look to third-party capital as a way to augment their own capacity to enter into these deals, or as retrocession for some of their longevity risk.
Of course it needs to be the right third-party investors to want to support this line of business, but a sidecar or third-party capitalised reinsurance vehicle could easily underwrite as a companion alongside a traditional reinsurer, helping them to enhance their relevance in this market and to take larger lines.
Read about many historical longevity swap and reinsurance transactions in our Longevity Risk Transfer Deal Directory.