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UK longevity swap activity driven by Solvency II: Aon Hewitt


Recent high levels of activity in the UK pension risk transfer market, featuring longevity swaps and longevity reinsurance transactions, are being driven by insurance companies drive to meet Solvency II requirements.

Lately activity in the UK longevity risk transfer market has not been driven so much by corporate pension schemes or plans seeking to protect themselves against the risk of their members living longer than forecast.

Instead it has been UK insurers, which face the impending and more stringent regulatory capital requirements of Solvency II, which have been seeking to optimise their capital and reinsurance with longevity exposures one of the areas they are looking to solve.

Aon Hewitt, the pensions, human capital and advisory arm of risk, insurance and reinsurance broker Aon, noted this trend in a recent report.

“The longevity swap market has been very busy throughout the year, and a key focal point has been transactions to transfer risk from UK insurance companies themselves,” Aon Hewitt explains.

They continue; “This reflects actions taken by insurers to adjust their business model, including the level of reinsurance, to its optimum level for the determination of their capital requirements under Solvency II.”

That could bode well for further activity, as life and pensions insurance companies look to offload longevity exposures as one way to resolve any capital requirement difficulties that they face, in advance of Solvency II coming into play.

“The swaps written in Q2 did not include any directly for company pension schemes, although large auction processes were progressing, as subsequently demonstrated with AXA securing a £2.8bn swap in Q3, passing risk to RGA via an internal insurance entity,” Aon Hewitt said.

Insurance companies are grappling with “the major challenges of adjusting to the new Solvency II requirements,” Aon Hewitt states. As a result we could see an increasing number look to source reinsurance for their longevity exposures, with the longevity swap an efficient way to transact this.

The end result will be further soaking up of global longevity reinsurance capacity, at a time when pension plans themselves are also increasingly looking to offload their longevity exposure. As a result any increased level of activity in longevity risk transfer raises the chances that a capital markets deal gets done, or that capital markets and ILS investors get to participate in a deal to some extent.

Read all about most of the recent longevity swap, reinsurance and risk transfer transactions here.

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