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Longevity risk on a bulk basis

Life expectancy has increased over the last years globally. In developed countries life expectancy has increased by 11 years between 1950 and 2010.

The market

In many coun­tries, the retire­ment system con­sists of three pillars: state pension, occupa­tional pension and private pension. The risk of a higher life expec­tancy, there­fore, creates chal­lenges not only for the indi­vidual who needs an income for a period longer than expected after retire­ment, but also for the govern­ment, corpo­rations offe­ring occupa­tional pensions, pension funds and life insurers who face retire­ment-related liabi­lities that in­crease as a result of im­proved life expec­tancy. This means that substan­tial longe­vity risks are held outside the insu­rance industry. Espe­cially for corpo­rations and pension funds this is poten­tially proble­matic as the future life expec­tancy is hard to deter­mine and the uncer­tainty about future liabili­ties makes mergers and acqui­sitions diffi­cult. In addition, corpo­rations are fre­quently pressu­rised from share­holders to focus on their core busi­ness and not on pensions.

Longe­vity risk transfer

During the last years various solu­tions have been deve­loped to trans­fer the longe­vity risk. The main solution avai­lable to pension schemes and insu­rance com­panies only wanting to transfer longe­vity risk, but no invest­ment risk, is the regular premium annuity treaty. A regular premium annuity treaty is a re­assu­rance struc­ture which involves the client paying a pre-agreed fixed premium cash flow plus an addi­tional fee to the reinsurer. The reinsurer in return pays the annuity pay­ments for the re­mainder of the pen­sioners’ lives. Both pay­ments are netted.

Regular premium annuity treaty Swapping expected and actual cash flows
longevity_swap

The reinsurer assumes both the longe­vity risk within a book of pensions and the related demo­graphic risk of provisions for dependants. Regular premium annuity trea­ties do not, however, cover typical invest­ment risks such as pure in­flation or asset manage­ment risk.

The un­certain future pension pay­ments are swapped against fixed known pay­ments so that the client has planning relia­bility about future liabi­lities and can invest his assets accor­dingly.

Develop­ment of the market

The UK takes up a leading role in the trans­fer of longe­vity risk. Since 2008 more than GBP 72bn liabi­lities have been hedged, with 2013 being the most active year so far with over GBP 16bn liabi­lities hedged.

We also see an increa­sing interest in longe­vity risk transfer solu­tion on a world­wide basis. Regular premium annuity trea­ties have been con­cluded already in different coun­tries outside the UK.

Hannover Re’s pro­position

Hannover Re is a market leader in the longe­vity market. With our exten­sive exper­tise in the longe­vity market we have suppor­ted our clients since 1995 with the deve­lopment of tai­lored solu­tions to trans­fer longe­vity risk. Until December 2015 Hannover Re has already con­cluded regular premium annuity treaties (in terms of net present value of liabi­lities) in the order of GBP 16 billion in the pension market.

In recent years Hannover Re has repea­tedly demon­strated that its exper­tise in rein­surance products for the longe­vity risk also extends to non-UK markets. Having been among the first regular premium annuity treaty provi­ders in the UK Hannover Re is now the first pro­vider of this solu­tion in the French market.

In Hannover, we have a sophis­ticated team of actua­ries with exten­sive expe­rience serving longe­vity business world­wide. Hannover Re coope­rates closely with its local enti­ties, provi­ding access to a world­wide know­ledge base.