Faster, stronger, bigger: a look at the global pension and longevity risk transfer market in 2018

Amy Kessler, Senior Vice President and Head of Longevity Risk Transfer at Prudential Financial Inc. is at RiskMinds Insurance this week discussing the global pension and longevity risk transfer market. Here, she gives RiskMinds365 some insight into the current conditions in 2018. 

After a decade of progress, the pension and longevity risk transfer market is delivering innovation faster than ever before.  It is also stronger due to the entry of several new insurers and reinsurers in recent years, and the expansion of capital and talent is allowing this market to grow bigger.  Increasing our impact as an industry is critical because our efforts create retirement security for millions of pensioners in defined benefit plans as well as millions of individuals preparing for retirement and needing lifetime income

Since 2007, more than $360 billion in transactions have taken place for defined benefit pension funds in the United Kingdom, United States, Canada and the Netherlands (1). This market is increasingly global and companies of all sizes and sectors are taking aim at a lower-risk future. The three primary solutions for pension funds are buy-outs, buy-ins, and longevity risk transfer. Each of these solutions is flexible and customizable, and can be tailored to meet the specific needs of pension funds and insurers.

The past decade of innovation has been driven by four key marketplace dynamics:

1. Greater customization and capacity
2. Globalization of de-risking techniques that have begun in the U.K.
3. Heightened global support for companies seeking to reduce pension risk—be it via large, multi-jurisdiction transactions, or gradually in phases
4. The ability to efficiently complete smaller transactions through flow reinsurance arrangements between insurers and reinsurers

Pension schemes are not the only entities seeking relief from pension and longevity risk. For insurers with annuity risks, similar techniques and expertise can be brought to bear to optimize risk and capital management. Since 2012, there have been more than $157 billion in transactions for insurers managing annuity risks (2). These include:

• $58 billion of U.K. annuity blocks that have been reinsured or sold; and
• $99 billion in longevity risk transfer transactions for U.K., French and Dutch insurers.

There are other markets with the potential to gain from these innovations in the years to come, such as Chile, France, Germany, Switzerland, the United States and Australia. Combined, these advancements in pension and insured annuity risk management have set the stage for continued growth in the worldwide longevity risk transfer marketplace.

An age-old problem

The pension and longevity markets are vitally important to society. With fertility rates falling, longevity increasing and the old age dependency ratio skyrocketing across the first world, we are facing a retirement security crisis. In many countries, people are falling short of 50% income replacement rates and far too many are not covered at all by workplace savings or pension programs. Life insurers and reinsurers are ideally suited to help with this challenge by providing retirement savings and investing programs, lifetime income solutions and pension de-risking for corporate defined benefit plans. All of these products and services help people achieve retirement readiness and security.

The next decade of innovation

Many problems have been solved and many effective de-risking techniques have been introduced in the past decade of innovation. But much work remains to be done, including:

• Enabling pension funds to de-risk despite the low interest-rate environment
• Adapting risk transfer solutions for collective defined contribution schemes
• Creating retirement savings programs for people without workplace coverage
• Bringing alternative capital and increased capacity to the market
• Introducing existing solutions to more countries
• Helping as many people as possible achieve financial security, retirement readiness and peace of mind

Of course, every person is unique but most will need support to save, invest and create lifetime income. Every pension fund is also unique, and each will embrace the risk management strategy that is most suitable for its risk appetite, resources, objectives and definition of success. The common thread is creating retirement security and bringing forth innovation in the insurance and reinsurance community that helps people and pension funds achieve a lower-risk future.

(1) LCP, Hymans Robertson, LIMRA and PFI analysis as of December 31, 2017.

(2) As of March 14, 2018. Source: PFI analysis of disclosed transactions. Note: many transactions have occurred in Germany, Canada and the U.S. but transactions sizes were not disclosed.

© 2018 Prudential Financial, Inc. and its related entities. Prudential, the Prudential logo, the Rock symbol, and Bring Your Challenges are service marks of Prudential Financial, Inc. (PFI) and its related entities, registered in many jurisdictions worldwide. This article does not constitute an offer or an agreement, or a solicitation of an offer or an agreement, to enter into any transaction (including for the provision of any services). PFI of the Unites States is not affiliated with Prudential plc, which is headquartered in the United Kingdom. The Prudential Insurance Company of America, Newark, NJ.