Swiss Re Insurance-Linked Fund Management

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Will rise in UK pension scheme buy-outs lead to rise in capital markets longevity risk transfer?


The Financial Times reported yesterday that UK pension schemes are increasingly seeking to enter into agreements to transfer the risks associated with their pension funds over to insurance companies. The common ways of achieving this risk transfer are buy-outs which involve a whole pension scheme being passed over to an insurer and buy-ins where an insurance policy is purchased to cover their liabilities.

One of the reasons for entering into these agreements is the longevity risk associated with pensioners. Pension schemes are increasingly nervous that as life expectancies increase their liabilities are increasing to a point where they want to get their pensions schemes off their balance sheets or at least protected against the risk of policyholders living longer.

A report by Hymans Robertson is referenced in the FT article which shows that buy-outs and buy-ins reached a value of £5.2 billion in 2010 compared to £3.7 billion in 2009.

With more and more pension liabilities moving into the hands of insurers it seems likely that this will trigger a rise in transactions to transfer those risks to the capital markets as insurers won’t want to hold those risks. Reinsurance of longevity risks and longevity swaps are now an established way to transfer these risks and activity in that area is set to grow during the next few years, but we expect the trend to increase capital markets risk transfer. The FT article reports that overall pension liability risk transfer deals including longevity swaps increased to £8.2 billion during 2010.

It’s possible that we could see insurers attempting to replicate the Kortis Capital Ltd. longevity risk insurance-linked security that Swiss Re issued in December 2010. That deal allowed Swiss Re to transfer longevity risks to the capital markets using a catastrophe bond type structure. It was an efficient way to achieve this risk transfer and with ILS investors seeking diversity for their portfolios it is likely we will see other insurers try to transfer some of their longevity risks through some kind of securitization.

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