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Towers Watson gives pensions direct access to longevity reinsurance capacity


Towers Watson has launched Longevity Direct, a service that aims to give pension schemes direct access to the reinsurance market for longevity risk transfer, giving them a dedicated cell that can be used to write re/insurance for longevity swap transactions.

Based in Guernsey, Towers Watson Longevity Direct will allow pension schemes and funds to establish their own ready-made insurance company cell which is able to write insurance and reinsurance contracts to help them hedge longevity risk for their Defined Benefit liabilities.

This business model follows the approach taken by the UK’s BT Plc which offloaded a huge £16 billion of its longevity exposures through a longevity swap transaction where it established its own intermediary insurance vehicle.

Towers Watson has taken this approach a step further, by launching Longevity Direct as a cell vehicle which its pension scheme clients can use to establish an insurance cell, through which they can facilitate their longevity swap needs, by entering into the reinsurance agreements through their own vehicle.

Towers Watson notes that this innovative structure can significantly reduce the cost of entering into longevity hedging transactions for pension schemes by eliminating the requirement to have an intermediary insurer to write the transaction. This should also facilitate larger transactions to be completed and enable pension funds and schemes to gain access to the most attractive reinsurance pricing.

Keith Ashton, UK Head of Risk Solutions at Towers Watson commented; “Access to the reinsurance market has become increasingly expensive and inefficient in recent years, but the appetite from Defined Benefit pension schemes to hedge their longevity risk has been growing strongly. Traditional intermediary costs can be several times higher than accessing the market directly and the aim of Longevity Direct is to provide more affordable and efficient access to the market.

“This structure also means the pension scheme can take advantage of the best possible reinsurer pricing, rather than having to compromise on pricing due to the intermediary’s exposure limits.  We also find that pension scheme and reinsurer interests are typically very aligned; a direct agreement can be much less complex than the longevity swaps we have seen in the past.  For these reasons we’re confident that the opportunity to access the reinsurance market directly is one that will appeal to a range of pension schemes who have previously held back.  We already have a number of our clients which are progressing longevity hedging through this structure.”

This is all about adding efficiency into the longevity swap transaction to reduce the costs and friction in getting deals done. Such a platform could help to increase the pipeline of transactions, much like the private catastrophe bond platforms have done in the property catastrophe ILS sector.

With the longevity risk transfer and hedging market receiving an increasing amount of focus, as governments and regulators come to terms with the spectre of pension shortfalls as a result of people living longer lives, there is an expectation that this market will grow.

There is also an expectation that once the longevity basis risk challenge can be solved and benchmarks or indices be introduced to stimulate liquidity, longevity swaps could begin to involve third-party capital more deeply as a market for this risk.

Towers Watson believes that its Longevity Direct service is ideally suited to longevity-hedging transactions where a single reinsurer can take on the whole liability, covering between £1bn and £3bn of liabilities. Many recent transactions have been larger, due to the economies of scale, so making these small ro mid-sized longevity swaps more efficient and cheaper could stimulate further market growth.

The greater simplicity of the cell structure means that transactions can be completed much more quickly as well, further reducing the set-up costs for pension schemes, Towers Watson explained.

Keith Ashton said; “The pensions-derisking market, in particular longevity-hedging deals, is set to continue growing next year. While we may not see mega-deals like the BT Pension Scheme deal, the efficiency, affordability and relative simplicity which Longevity Direct offers is likely to prove very appealing for many pension schemes which have been waiting for the right opportunity.”

Adding up all the 2014 longevity deals we have listed in our directory and converting them using today’s exchange rate gives us a total for 2014 longevity swap, reinsurance and risk transfers of £40.79 billion ($63.88 billion or €51.05 billion). If facilities such as Longevity Direct from Towers Watson can stimulate increased risk transfer, due to greater efficiencies, we could witness this market grow rapidly given the demand for hedging longevity risk.

Further reading:

OECD calls for capital markets to embrace longevity risk hedging.

New research allows longevity swap basis risk to be better assessed.

Okay to account for pension plan longevity swaps at fair-value: IFRS.

Longevity swaps cover £22 billion of liabilities so far in 2014: Aon Hewitt.

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