Swiss Re innovates on longevity but greater capacity is needed

Swiss Re’s recent £800 million longevity insurance contract covering UK insurer LV='s UK pension fund represents yet another innovation in this field for the reinsurer.

This is due to it being the first pension plan longevity deal covering members yet to retire. However, for all the breakthroughs Swiss Re has made in finding solutions in this field, much work is still to be done.

That is the view of Costas Yiasoumi, head of Longevity Solutions at Swiss Re Corporate Solutions, who points out that although Swiss Re has been very active in this field and continues to innovate, the deals it has done are a drop in the ocean when the vast scale of this liability is considered.

“Even though we call it a ‘swap’, this type of deal is actually a straightforward indemnity insurance contract, something already being widely applied to a vast range of risks,” he says.

“Perhaps more interesting is the fact that global longevity exposure is estimated at around $20 trillion. This far exceeds the capacity of the insurance industry, and so we will need to look into alternative ways to meet that exposure.”

Swiss Re has already tested the appetite of the capital markets for this type of risk. In 2010, it launched a $50 million deal called Kortis Capital, which transferred longevity trend risk into the capital markets as a securitisation.

Yiasoumi says more deals are in the pipeline structured to transfer the risk to both the capital markets and the reinsurance industry. Demand is strong for such deals but only the capital markets will be able to find the capacity needed.

“Pension fund managers and insurance companies are more aware of their longevity exposures and the types of solutions reinsurers can offer. Reinsurers have capacity to take on longevity risk, but we won't use that capacity all at once.

"I would expect to see only a small number of deals per year for a long time to come. The $20 trillion in longevity exposure out there far exceeds the capacity of the industry, and so alternatives will need to be found at some point. The development of a capital market for longevity exposure is a long-term mitigate in this respect.”

This recent £800 million longevity insurance contract covers more than 5,000 members of the pension fund LV= Employee Pension Scheme. The deal means that Swiss Re has now completed reinsurance deals in this field worth more than $12 billion.

Yiasoumi says that the unique scope of the deal, covering members yet to retire, meant some interesting challenges when structuring it. “For example, a pension plan member has several options when he or she retires. They can take a lump sum, they can move the money to a different pension fund, etc. So for us the question is what exactly will be insured,” he said.

He also adds that it is important to note that when doing these deals, Swiss Re does not pass the risk on but keeps it on its own books. “This means we can be more flexible in meeting the client's objectives. For example, although it is common for pension plan longevity swaps to be collaterised, on our deals parties only post collateral if longevity changes materially which means the collateral arrangement has a much lower operational burden.”