The recent report on longevity risk from the IMF highlighted that the exposure is likely being severely underestimated and that globally longevity risk amounts to tens of trillions of dollars of exposure which is not currently being managed. The amount of longevity exposure in pension funds around the world is significantly larger than the capacity of the insurance industry to be able to underwrite it, because of this the capital markets are the only likely source of risk capital which could enable pension funds to hedge their longevity risks effectively.
Reinsurer Swiss Re agree’s, according to this article in European Pensions. Because the insurance industry is nowhere near to being large enough to assume longevity risk on a global scale they say that a capital market for longevity risk has to be created.
Costas Yiasoumi, Head of Longevity Solutions at Swiss Re, says that currently this problem isn’t manifesting itself as not many pension funds seek to offload longevity risks yet and so the re/insurance industry is doing a good job of assuming that risk. However, he asks a question that we have highlighted many times in articles on Artemis, what happens when suddenly longevity risks catch up to pension funds and many more of them start to look for capacity to offload their risks and liabilities? Re/insurance capacity to assume longevity risk will evaporate pretty quickly and pension funds will have to look elsewhere for capacity to transfer longevity risk to. That’s where the capital markets come in as the only source of capital large enough to deal with longevity on a large-scale.
Efforts are underway to build an investor base in the capital markets for longevity risk. Swiss Re issued the only longevity securitization in bond format through Kortis Capital Ltd. back in 2010 and recent deals such as the Aegon and Deutsche Bank longevity swap are helping to expand the investor base and educate the capital markets in what could become a new asset class for them. Further education and more transactions are needed if the capital markets are to become the destination for longevity risks, otherwise the market will risk re/insurance capacity running out or becoming very expensive as it becomes more saturated.