Strapline
ILS Intelligence
“In the UK domestic market it has mostly been driven by the regulatory
changes over the last couple of years for the domestic pension industry,” he says. “These longevity swaps are propelled mainly by UK life insurance companies and pension plans, and it has become a quite developed market, which is reflected in the volume of transactions.”
Mullins also notes that a variety of other issues is driving demand for longevity swaps at the moment, particularly around the structure of the products that have been offered.
“Historically in the UK companies have operated defined benefit
pension schemes, which gave the members of those schemes a promised level of pension for the rest of their lives,” he says.
“This means that in the UK there is a massive amount of defined
benefit pension scheme risk that has built up on company balance sheets. This contrasts with other countries, such as France, which has a different pension system more akin to defined pension contribution arrangements.”
While many of these deals have been with large banks, a lot of interest in longevity swaps is coming from reinsurance companies. This is because it allows reinsurers to diversify the risks on their balance sheets, argues Hilti.
“A longevity swap is of interest to reinsurers because it allows them to
diversify the risks that they already have on their balance sheet. It is also not very capital intensive, and from that perspective it’s clearly an interesting risk,” he says.
“The other interesting factor is the long duration of those swaps, which
can be used in order to optimise their asset liability management, in very general terms. This allows them to enter into relatively long investments. This is not true for all reinsurers, but some have discovered that they can achieve quite interesting liabilities through longevity swaps.”
This interest from reinsurers has yielded a positive result for pension funds looking to offload their risk in the form of very attractive pricing. This, too, has fanned the flames of activity in the longevity swaps arena, according to Mullins.
“The competition and appetite for risk from reinsurers means that pricing is attractive, and is really driving activity,” he says.
“There is a lot of appetite from pension schemes to tackle this risk.
It’s a big issue for them, particularly those which are mature and have a lot of pension members who have already retired. This is also true for those which have taken steps to mitigate other risks. For example, Rolls Royce has moved a lot of its investments out of the stock market into safer investments, such as government gilts.
“Because they have already tackled investment risk, life expectancy risk
becomes more significant, so it is an obvious next step to tackle that risk. In the UK, pension schemes want to do more to reduce their risks, and due to the attractive pricing at the moment, life expectancy has been an obvious risk to address,” says Mullins.
However, it is not just the UK pensions market that has woken up to the possibilities which longevity swaps offer. Pension schemes in Europe,
50 | INTELLIGENT INSURER | Summer 2012
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