Aon Hewitt, the retirement, talent and health solutions business of insurance and reinsurance broker Aon plc, noted today that the UK longevity swaps market has reached £50 billion of deals and should hit £70 billion by the end of 2015.
2015 is likely to see an increased number of pension schemes seeking to access sources of longevity insurance and reinsurance capacity, Aon Hewitt said, and the significant amount of reinsurance capacity available for longevity risks, along with streamlined deal structures and timelines should ensure further growth.
Aon Hewitt records the start of the UK longevity swaps market as being mid-2009 (we have them all listed in our longevity swaps and risk transfer deal directory, with £50 billion of deals completed since that time. The £50 billion of longevity swaps is dominated by a number of very large deals, the biggest being the £16 billion BT Pension Scheme longevity swap, but the market is responding with structures and terms designed to make it cheaper and easier for smaller schemes to access.
Martin Bird, senior partner and head of risk settlement at Aon Hewitt, commented; “The longevity swap market may well be perceived as having been rather stop-start. But today, with over £50billion of risk successfully transferred to the reinsurance market, the outlook is very different. The reinsurance market remains buoyant and is keen to capitalise on the investments made in terms of building capability and resource, in order to price, structure and execute deals. We see no shortage of capacity and can already see a deal flow of more than £20 billion during 2015.
“As with any healthy market, innovation has been a key factor; for example, 2014 saw a major change in the approach to intermediation. In particular, at the larger end of the market, we saw a focus on the most efficient way to access large scale reinsurance capacity. Both the Phoenix Group and Aviva deals made use of a sponsor owned insurer as the intermediary, and the BT Trustees set up their own insurance company in Guernsey to enable their deal.”
These structural innovations are similar to some of the advances seen in catastrophe bonds, which allowed smaller sponsors to access the capital markets through the use of issuance platforms designed to reduce the costs of intermediation. The longevity swaps market has followed suit, although for the moment the majority of longevity risks still end up in the traditional insurance and reinsurance market, rather than capital market.
Bird continued; “Now in 2015, various middle ground solutions are coming on-stream very quickly, allowing pension schemes to have a more direct relationship with the reinsurance market to generate price savings, but without taking on the risks associated with a “self-intermediation” approach.
“Innovation is also happening at the smaller end of the market. While there have been a number of ‘mega deals’, this may not be indicative of where the market is going next. After all, there are many more smaller-sized pension schemes looking to derisk and increase stability, so the significant interest for longevity risk from the reinsurance market is trickling down into that territory. Deals of around £50 million are being priced and analysed – a classic example of how smaller schemes can capitalise on the knowledge gained from the big deals.”
The longevity risk transfer market is a source of significant income for insurers and reinsurers, particularly those who find the longevity risk a counterbalance to the mortality risks they assume through life insurance underwriting.
With further growth expected the search for mechanisms to enable the transfer of longevity risks to the capital markets will likely also continue, as certain investors find the profile of longevity risk investments attractive.
This ample available capacity should ensure Aon Hewitt’s forecast for £20 billion of UK longevity swaps in 2015 is accurate, perhaps even an understatement given the appetite amongst reinsurance capital providers for this risk.
All of the UK deals are included in our directory of major longevity swap, longevity reinsurance and risk transfer transactions.