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Longevity Solutions professie & praktijk by Kai Hoffmann and Jos Cobben LONGEVITY SOLUTIONS There are diverse solutions for the transfer of longevity risk available to pension funds and insurers in the Netherlands and across Europe. As the market develops, there is a very important role to be played by reinsurers and those actuaries who are helping to solve the issue of how to fund for longer lives. Development of the market Potential demand for longevity risk transfers is Historically, the approach adopted by pension funds substantial with hundreds of billions of Euros of included a simultaneous transfer of assets through the exposures in the Netherlands and trillions of Euros of Kai Hoffmann, FIA, is purchase of a bulk annuity (such as a buyout1 or the exposure globally. The capacity for these risk transfers is Pensions Longevity more recent buyins2). Over the last few years, pension provided by the global reinsurance market as reinsurers Originator at Swiss Re Corporate Solutions funds have been looking to transfer longevity risk only. see longevity risk as a welcome hedge for the mortality There have now been a number of "longevity insurance" risk they have reinsured. For some transactions, / "longevity swap" transactions in the UK – including by investment banks act as intermediaries; other the pension funds of household names such as transactions are done directly with a reinsurance group. AkzoNobel, Rolls-Royce, British Airways or BMW – and Where banks are involved, they tend to take a "spread" there is interest elsewhere in Europe. for structuring the transaction but do not retain a significant part of the risk partly due to the capital "Longevity only" risk transfers have been established in impact of holding illiquid long-dated exposures on a the insurance market for even longer, with primary bank balance sheet. insurers passing on the longevity risk on their annuity portfolio to reinsurers ever since the first publically Given the long-tailed nature of longevity risk, the drs Jos F.L. Cobben AAG, SAV announced transaction between Friends Provident and capital markets are yet to take on significant longevity is Chief Risk Officer Reinsurance EMEA at Swiss Swiss Re in April 2007. Although transactions to date risk from a pension fund or primary insurer. There has Re have primarily been in the UK market the products are been some activity, including a small national 1 – A buyout is a bulk also directly relevant to pension funds and primary population hedge transaction with a pension fund in annuity transaction where insurers in the Netherlands. the UK in 2011 (Pall UK), an economic capital driven the fund transfers its "out of the money synthetic portfolio hedge" of an liability to an insurance company; the fund then Longevity (re)insurance insurer's annuity portfolio in the Netherlands in 2012 holds no further liability At their core, longevity (re)insurance contracts exchange (AEGON) and the issuance of a tradable and rated towards the retirees. a series of fixed payments (premiums) for a series of longevity trend bond in 2010 (Kortis by Swiss Re). The 2 – Under a buyin floating payments (claims). The claims mirror the total exposure transferred by these three transactions to transaction, a fund buys a pension payments made by a pension fund or insurer, capital market investors is under one billion Euros, a bulk annuity from an insurance company which it the premiums are defined and fixed at the outset. By fraction of what has been written by reinsurers. treats as a plan asset, ie the entering into such an agreement, the pension fund or fund retains the liability to pay pensions to the retirees insurer is protected against any uncertainty around how Swiss Re, as the world's largest reinsurer of mortality but the fund receives long the individuals covered by the contract will live as risk, plays a central role in offering its longevity capacity annuity payments from the the contract continues until the last pensioner (or both to pension funds and to primary insurers. The buyin that match these pension payments. surviving partner) dies. transactions to date include two longevity insurance contracts with UK pension funds (AkzoNobel, Royal Scenario 1: Net difference paid Annual premiums County of Berkshire) and various longevity risk transfers by Swiss Re to the pension plan Scenario 1: Illustrative increased annual with primary insurers (including Friends Provident and pension payments for current and future pensioners if longevity gets longer the Co-operative Insurance Society). The total liability insured by Swiss Re in these transactions is Scenario 2: Illustrative lower annual pension payments for current and future approximately USD 20bn. pensioners if longevity gets shorter The role of actuaries Throughout the process of marketing, implementation Scenario 2: Net difference paid and operation of these longevity hedges, Swiss Re's in- by the pension plan to Swiss Re house actuaries are involved. This starts with the sales Annual pension payments pension Annual and marketing teams which consist of pensions 2012 actuaries (for pension funds) and life insurance 44 de actuaris november 2012 professie & praktijk actuaries (for primary insurers). The pricing work is Pension funds in the Netherlands have seen a carried out by a team of life actuaries specialising in significant strengthening of their assumptions as the longevity. Once a longevity (re)insurance contract is in industry tables were updated twice over the last place, the reserving actuaries are involved in monitoring decade. Taken together with some form of fund-specific it. adjustments, the assumptions may start to get close to the view of the reinsurance market. However, this will Swiss Re is committed to leading longevity research and vary between pension funds. development (R&D). Our R&D department is headed by a medical doctor who is also an actuary and his multi- As risk is transferred (and the reinsurer needs to back disciplinary team includes actuaries, pharmacologists, the liability with risk capital), some cost for entering demographers and medical professionals. One of the into a longevity hedge is to be expected. Economically, strands of R&D work focusses on forward-looking longevity risk sits much more naturally on the balance mortality models that go beyond pure statistical sheet of one of the globally diversified reinsurers than analyses. This is achieved by having models that are with a pension fund which could be seen as almost a scenario-based – with each scenario either combining longevity mono-line with very limited diversification various treatments and risk factors or focussing on a benefit from its mortality exposure. series of developments around a common area. Longevity and the Dutch market New models There is an expectation that the Netherlands will be While new models will enhance the understanding of amongst the next countries where longevity insurance longevity risk, pension funds and primary insurers will contracts are implemented for pension funds. A marked continue to be exposed to uncertainty around how long level of market interest has quietened down as the New individuals will live and no model can predict the Pensions Accord settles in. Once the legislative changes actual mortality for a specific population. Whether they have been digested, pension funds will be able to focus decide to transfer this risk to a reinsurer will depend on on managing their longevity risk again. a number of factors, the most important of which, in the authors' view, is the difference between the market The interest amongst insurers is similarly likely to price for longevity and the longevity assumptions a increase once Solvency II has been implemented so that pension fund or insurer is currently adopting. the capital relief achievable through longevity reinsurance can be quantified with greater certainty. Taking the UK pension fund market as an example, the market started to see transactions in 2009 when some Overall, the Netherlands will be an interesting market pension funds' view on life expectancies started to get for longevity (re)insurance over the next few years. close to the reinsurance industry's view. Over the years since, most pension funds continued to strengthen their longevity assumptions bringing more funds close to where the (reinsurance) market was willing to "buy" longevity risk. Transactions are now taking place with prices only a few percentages above the existing funding liabilities. Insurance premium for longevity insurance Actual cost Realistic pension reserving for longevity ‘Catch-up’ premium Perceived cost Pension plan current reserving for longevity Annual pension payments pension Annual 2012 de actuaris november 2012 45.
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