A new Swiss Re Economic Research & Consulting report reveals that Canadian pension funds have a significant amount of longevity risk to which they are exposed. Many public and private pension funds are under-reserved for longevity risks and annuity books also have exposure to the risk of scheme members living longer.
These funds need to address their risks through the use of instruments such as buy-outs, buy-ins, longevity re/insurance, longevity swaps, and longevity bonds to transfer their longevity risks to another party or to the capital markets. The report from Swiss Re identifies over CAD1 trillion (about USD$1 trillion) of pension assets and immediate annuity reserves as at risk in Canada as of 2010. Interestingly the report suggests that by miscalculating longevity by just one year a pension fund’s liabilities can grow by as much as 5%.
“Increasing life expectancy is one of the greatest achievements of the 20th and 21st centuries, however, pension funds and annuity providers may have underestimated how long their members and policyholders will live. To protect their solvency and ensure they can continue to provide retirement income, these entities can now transfer some of their longevity risk,” explains Kurt Karl, Head of Economic Research & Consulting at Swiss Re.
The report suggests that the market for longevity risk transfer through the variety of instruments we mentioned above, is expected to grow to as much as CAD180-315 billion in total assets transferred by 2020. A significant jump from where the longevity market in Canada is today.
With so much risk transfer projected to happen within the next ten years in Canada alone, the longevity risk transfer market is going to have to adopt mechanisms for transferring these risks to the capital markets. Swiss Re’s own longevity trend insurance-linked security, Kortis Capital, could just be the poster child for this market which allows insurers and reinsurers to keep the amounts of longevity risk they assume to manageable levels by offloading some to capital markets investors. The market is constantly discussing the need to turn longevity into an asset class and ILS would certainly provide a mechanism to do so.
You can download the full report from Swiss Re in PDF format here.