Age shall not weary insurers

Life insurers and pension funds around the globe are facing significant longevity risks as life expectancies continue to rise. Two recent transactions completed in Australia demonstrate how reinsurance can provide an effective solution.

Swiss Re in Australia has recently been chosen by two separate annuity providers as reinsurance partner for their respective in-force lifetime annuity portfolios.

These ‘longevity swaps’, both completed within the last year, transfer the longevity risks through a straightforward reinsurance treaty in which the annuity provider pays regular premiums according to a fixed schedule and Swiss Re pays the actual ‘floating’ annuity benefits.

In this long term contract with long term commitment by both parties, policy administration and the assets backing the liabilities remain with the annuity provider. Asset-liability matching is enhanced due to the increased certainty of the liability cash flow. 

“With longevity reinsurance, our clients can focus on asset management and other core activities, while being able to offer comprehensive solutions to their customers”, says Patricia Berry, New Business Origination Actuary at Swiss Re. “Regulatory capital for annuity business in Australia can be substantial. With the removal of the longevity risk, the associated regulatory and economic capital can be released, providing a very attractive additional benefit for our clients especially given the current climate.”

Patricia says that, while other risk transfer solutions are emerging, “reinsurance with Swiss Re remains relatively simple to execute and easy to understand when compared to other capital market offerings. Long term financial security with a global reinsurer like Swiss Re is also ensured.”

Thanks to Swiss Re having a local life licence in Australia, these transactions have enabled the annuity providers to achieve full regulatory capital relief in respect of the longevity risk of the reinsured portfolios.

Each transaction resulted from many months of close working partnership with the client, including analysing past mortality experience and gaining in-depth understanding of the benefit features for modelling purposes. A project team within Swiss Re was set up leveraging the various skills and expertise of Swiss Re professionals in Europe, Hong Kong and Australia.

In addition to the Australian transactions, Swiss Re has also completed a number of bulk annuity transactions in the UK that , total over GBP 7 billion of liabilities. Mortality trend uncertainty has become a key issue in the UK market given Britain’s compulsory annuitisation of retirement savings. 

Patricia believes this risk-transfer market will grow in Australia. “Longevity is certainly receiving increasing attention by market players and government given Australia’s ageing population and the debates around retirement income solutions. Together with the desire to remove non-core risks by many insurers and funds, the wholesale longevity market is set to grow.” 

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