LONDON, Sept 26 (Reuters) - “Stop talking and start trading” is the message from pension and life insurance experts eager to spread the longevity risk caused by an ageing population to capital market investors.
The risk of people living for up to 20 years after retirement has crept up on an industry based on using historical data to calculate people’s chances of an early death.
Pension funds have traditionally used reinsurers to hedge their liabilities for a defined period - but the reinsurance industry is reaching its capacity to cover the protracted pensions payments, a panel of experts told a London conference of insurance-linked securities (ILS) clients and its investors.
“We have everything we need to start completing structured transactions - but the market needs to start doing deals,” said Cord-Roland Rinke, deputy managing director at Hannover Life Re .
“The amount of capacity available from capital market investors is substantial,” said Jeff Mulholland, managing director and head of insurance and pension solutions-Americas at Societe Generale.
The panel, which included AEGON, Societe Generale, Credit Suisse and Hannover Life Re, predicted 2-5 longevity risk transfer deals via ILS in the next 12 months.
ILS are capital market vehicles that allow a company to shed a risk. The most common form of ILS is the catastrophe bond - in which insurers manage their exposure to natural disasters by passing on potential losses to investors.
Life insurers and banks are working to construct capital markets instruments to slice and dice longevity risk into tradeable portions. The UK in particular has seen a number of longevity swaps - deals where a counterparty takes on the liabilities for a period, pocketing the difference if payouts fall short of trustees’ estimates, and paying out if they overshoot.
The problem has been pension funds, reinsurers and investors have disagreed on pricing mortality improvements, and investors have been uncomfortable about investing in longer term risk - a longevity swap can be for up to 30-40 years.
Back in December 2010, Swiss Re launched a series of longevity-based ILS notes, the first time the risk of people living longer than expected has been securitised in catastrophe bond form. Special purpose vehicle Kortis Capital Ltd is an eight-year bond, which will pass Swiss Re’s longevity risk direct to capital markets investors.
The deal used a longevity risk model from risk modeling firm RMS, which examines the future waves of mortality improvement.
“The market has accepted the RMS model in terms of taking on risk - the onus is now on the banks and (re)insurers to develop a liquid market,” said Mulholland.
He said part of this would be through transparency of data - and pledged that Societe Generale would actively show pricing models to counterparties.
“We need transparency of data to jump-start the development of this market,” he said.
On Monday, Swiss Re said insurers did not have enough capacity to cover nearly $23 trillion in global pension liabilities against longevity risk and called for a capital markets solution to tackle the issue.
- For more details on cat bond transactions, see the Thomson Reuters Insurance Linked Securities Community, click here. (Reporting by Sarah Mortimer; editing by Stephen Nisbet)