Structures help largest pensions access reinsurance more effectively: Aon

Innovative insurance and reinsurance market regulatory structures help even the largest pension schemes in the world access the reinsurance market more efficiently, broker Aon said.

It’s interesting, as we spend much of our time writing about how the world’s largest pension fund investors can efficiently access the reinsurance market as a source of alternative investment return.

But, in the case of longevity risk transfer, this gets turned on its head and pensions look to access the reinsurance market as efficiently as possible for sources of risk capital protection, rather than risk linked returns.

The key to this is putting in place and having access to the right structures to facilitate this access, which goes for both of the pensions use-cases in reinsurance.

In the case of investing, the special purpose insurer (SPI) and segregated cell or protected cell structures enable large institutional investors, such as pension funds, to more efficiently and directly access reinsurance linked returns.

In the case of longevity risk transfer, particularly longevity swaps, large pension schemes can put an insurance structure such as captive, or a special purpose insurer (SPI), between them and the reinsurance market in order to gain more direct access to reinsurance capacity to back their insurance needs.

The latest example of this in longevity risk transfer was the £7 billion HSBC UK pension scheme longevity swap and reinsurance arrangement with Prudential, which broker Aon advised HSBC in Bermuda on.

To transact that deal, HSBC used its Bermuda domiciled captive insurance vehicle, which entered into the swap with the pension scheme and then a reinsurance arrangement with Prudential.

Aon mobilised a multidisciplinary team to assist HSBC in the transaction, featuring expertise from Aon’s UK based risk settlement group, led by its senior partner Martin Bird, and Aon Insurance Managers (Bermuda), led by managing director Anup Seth.

The team helped to set up and license the new captive solution and advised on the operational infrastructure required to service the longevity swap transaction on an ongoing basis.

Tom Scott, principal consultant in Aon’s Risk Settlement team, commented on the deal, “This landmark transaction in which we supported HSBC in Bermuda represents another step forward in terms of innovation, with captive structures and other types of insurance structures now enabling even the very largest schemes to access the reinsurance market in an effective manner.”

Martin Bird, senior partner and head of Risk Settlement at Aon, added, “It is particularly pleasing that Aon was able to bring together all the necessary expertise to support this transaction. Working in the various offshore locations on this type of longevity deal requires a combination of both jurisdictional expertise and good working relationships – as well as the very longevity-specific expertise related to operational deal structuring.

“We continue to see very strong demand for pension scheme de-risking solutions, whether in bulk annuity or longevity-only formats –  and 2019 remains on course to be another record breaking year for this market.”

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