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Room for capital markets solutions in longevity risk market: Kessler, Prudential


As the longevity risk transfer market continues down its impressive growth path, Amy Kessler, Head of the Longevity Risk Transfer at Prudential Financial, Inc. of the U.S., believes there is room for capital markets solutions to play a role.

Amy Kessler, PrudentialFollowing a record-breaking 2018, the longevity risk transfer market is poised for further expansion in the months ahead, with demand showing no signs of abating anytime soon.

2018 witnessed more transactions in the UK, U.S. and Canada than ever before, and if markets hold, it’s expected that 2019 will again break records.

In light of unprecedented longevity risk transfer market expansion, which is assisted by favourable market conditions, Artemis spoke with Prudential’s Kessler about the potential for the capital markets to have an influence in the sector.

“There is absolutely room for capital markets solutions, including sidecar vehicles, to participate in the longevity risk transfer space.

“Sidecar arrangements would allow investors to co-invest with the insurers and reinsurers in the pension and longevity risk transfer market. Sidecars allow investors to take on the risk, and benefit from the return, of specific books of insurance and reinsurance business. This approach has many advantages,” said Kessler.

Specifically, explained Kessler, in certain longevity risk transactions, investors may be able to take a proportionate share of profits and losses alongside a reinsurance company with its own capital at risk on the same terms. This is an approach that enables investors to benefit from both the insurance and actuarial expertise, while also being able to access some of the big data that reinsurers leverage to analyse this kind of opportunity.

“This market is in its infancy and is building on some earlier transactions where several market participants came together, each taking their preferred sliver of risk,” said Kessler.

Adding, “Sidecar transactions are likely superior to index based solutions that have been tried in the market but have not thrived because they leave the pension fund or insurer transferring only population level longevity risk with too much basis risk between their actual exposures and the index.

“The sidecar approach is superior because it can eliminate basis risk altogether for the insurer seeking a hedge, while leveraging investor capital alongside the capital and expertise of a reinsurer.”

With pension de-risking expected to persist, demand for longevity reinsurance to support buy-ins, buy-outs and swaps is sure to increase as a result. While the market remains in its infancy, as highlighted by Kessler, the opportunity is there for capital markets solutions to play a meaningful role in the longevity risk transfer space.


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