New report sets out strategies to address longevity risk in Canada

Longevity risk and protection for Canada, a new report by Swiss Re, says Canada’s USD 1 trillion pension assets may be insufficient because we’re living longer.

Longevity risk is the financial risk that people live longer than predicted. Underestimating life expectancy by just one year can push a pension fund’s liabilities up by 5%, so getting it right is a major challenge for pension funds and annuity providers.

Canada a major market

But the insurance industry can help by taking on some of the risk. Using insurance or reinsurance, pension plans and insurers can transfer their risk and indemnify themselves against future, unexpected increases in longevity.

Most of these transactions have taken place in the United Kingdom. But, the report says, pension funds and annuity providers in other countries should mitigate their exposure to increased life expectancy. Canada is one major market which has had – so far – only one longevity transaction.

Significant potential

The scale of the risk involved is usually measured by the size of the assets currently set aside by pension providers to pay tomorrow’s liabilities. According to Swiss Re, by 2020 the market for longevity risk solutions – including buy-outs, buy-ins, longevity re/insurance, longevity swaps, and longevity bonds – could grow to as much as USD 315 bn in total assets transferred.

Kurt Karl, Head of Economic Research and Consulting at Swiss Re says, “Reinsurers are often seen as the natural home for longevity risk, thanks to their ability to accumulate many uncorrelated risks across many countries. For reinsurers with exposure to mortality risk – the financial risk that people die sooner than expected – longevity risk can provide a partial offset.”

Published 24 October 2011

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