The amount of longevity exposure in pension funds globally is much more than the capacity of the insurance industry to write it, and a capital market for longevity risk therefore has to be created, Swiss Re said in a response to the recent IMF report.

The IMF calculated that age-related spending would double by 2050 due to longevity and Swiss Re said that this is in line with what they had expected. The reinsurer’s head of longevity solutions Costas Yiasoumi pointed out that the UK has been the global leader in terms of the market for longevity solutions.

“If we concentrate on pension plans, the two main types of solutions for transferring the risk are bulk annuities or longevity swaps. We’ve seen a number of transactions undertaken in the UK over a number of years by pension plans in those areas.” As an example he mentioned the Royal County of Berkshire Pension Fund in 2009, the British Airways’ Airways Pension Scheme in 2010 and the Pilkington Superannuation Scheme in 2011.

However, the amount of longevity exposures in pension funds around the world is much more than the capacity of the insurance companies to write it. Yiasoumi said that this is not yet a problem, as the number of pension funds asking for longevity swaps is relatively small, but over time that capacity that reinsurance companies have will get used up.

“What is recognised as more and more pension plans realise they shouldn’t really be holding this risk and want to insure against it, is that that capacity will be started to be used up and we need to find new capacity from somewhere else. That’s where the capital markets come in and there’s work being undertaken by various organisations to try and generate demand for investing in longevity from new investors.”

Swiss Re issued the world’s first tradeable longevity bond in 2010 and other organisations are doing similar things to get investors familiar with this as a risk and to build an investor base. However, this will take a long time and for now the capacity for longevity is with reinsurance companies, Yiasoumi said.

“It’s an important aspect, because you could find that if lots of pension plans start hedging longevity, whether it’s after five, ten or fifteen years, that capacity that reinsurance companies have will start coming under stress. That’s why it’s important that even though there’s still reinsurance capacity at the moment, we still do the work so that in the medium to long term we can find additional capital to provide the protection that pension plans need.”

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