the US and the Far East have all begun looking into the use of such instruments, says Hilti.
“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.”
“Recently we have seen activity coming from the rest of Europe,
particularly in the Netherlands, and further afield in places such as Japan,” he says.
“The main driver in Japan has been longevity itself, because the entire population is getting older. The pension industry is also a key factor of the Japanese economy, so this is where the demand is coming from. But it is still in its formative stages—the market there is not very developed.”
While slightly different in the way that it is organised, in general terms
the Japanese market bears a striking resemblance to the UK market, argues Hilti.
“Maybe the private pension schemes are a little bit more important in
Japan, due to the fact that they are very large operations, as well as the fact that people usually work for one corporate entity for their entire lives,” he says.
“This is only a moderate difference—in other ways the two are very similar.” One of the key drivers of why these swaps have become so popular is because
of the burgeoning deficits facing funds around the globe. For example, in the UK alone there is an estimated £1.3 trillion deficit on public sector funds, in comparison with roughly £0.3 trillion in the UK private sector.
These measures of the deficits give an idea of the current potential of the
market. It is also attributable to the shrinking asset base during the financial crisis, argues Blaise Bourgeois, life chief risk officer at AXA Group.
“Innovative solutions such as longevity swaps provide for a capital
market hedge against any further deviation in mortality improvements already factored into the reserves of long-term liability holders at times when the cost of an ageing population is becoming a critical issue for public and private sector fundings alike in many countries. This means that the longevity swaps market has a huge potential for growth,” he says.
Rupen Shah, head of longevity at SCOR, agrees that the market,
especially in the UK, is growing and notes that while reducing insurance and reinsurance capacity at current market prices could slow growth, this is not likely to happen for some time.
“If the capital market solutions develop, it is more likely that they may help
insurers and reinsurers transfer excess risk to allow increased capacity for new business, rather than provide solutions to pension funds directly,” he says.
“Outside the UK, the Netherlands may well be the next market that
gains traction. It also seems likely that the Canada and US markets could develop soon. Pension funds and their sponsors in other markets probably require similar regulatory, accounting and shareholder/analyst pressure to that seen in the UK, before we see any significant volumes transacted outside the UK.”
Given the evidence it seems likely that the longevity swaps market will
continue to provide opportunities for reinsurers and pension funds for a long time to come.
Summer 2012 | INTELLIGENT INSURER | 51
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