Advanced Reinsurance Seminar August 15 16, 2016 Hyatt Rosemont Hotel Rosemont, IL

Transcription

1 The Reinsurance Section Presents Advanced Reinsurance Seminar August 15 16, 2016 Hyatt Rosemont Hotel Rosemont, IL Reinsurance of Longevity Risk Presenters: Larry N. Stern, FSA, MAAA

2 Reinsurance of Longevity Risk Advanced Reinsurance Seminar August 16, 2016 Larry Stern, FSA, MAAA President Canterbury Consulting, LLC 1

3 I advise you to go on living solely to enrage those who are paying your annuities. It is the only pleasure I have left. (Voltaire) 2

4 Longevity risk what is it? Risk people live longer than expected Longer life generally recognized as a good thing Living longer can also have significant financial implications Pension fund and annuity liabilities amount needed to meet future payment obligations Amount driven by two factors o Return on assets accumulated o How long payments will be made (mortality and mortality improvement) Potential shortfall in pension fund and annuity liabilities stems largely from uncertainly as to how mortality will evolve and the future improvement in mortality rates 3

5 Longevity risk what is it? Potential shortfall in pension fund and annuity liabilities stems largely from uncertainly as to how mortality will evolve and the future improvement in mortality rates Globally, life expectancy at birth has more than doubled over the last two centuries 1 o Life expectancy for individuals age 65 has increased an average of nearly two months per year over the last decade o For each additional year of life expectancy not assumed can be expected to add 3% 5% to current liabilities 1 Directorate For Financial and Enterprise Affairs Insurance and Private Pensions Committee Report May 30, 2014 [DAF/AS/PEN/WD(2014)] 4

6 Managing longevity risk Pension funds and annuity providers are exposed to additional longevity risk if mortality assumptions used for valuation are significantly different from experienced improvements and the future expectations are based on this experience Step 1: ensure mortality assumptions used account for the expected improvements in mortality and life expectancy o Tables account for mortality improvement o Tables based on relevant data Step 2: use financial instruments to mitigate excess longevity risk o Hedge or mitigate the risk of financial loss of an investment continued 5

7 Managing longevity risk across the pond UK, Ireland, Europe mature markets, mandatory annuitization of government/private pension schemes Explicit methods for calculation capital for longevity risk UK Financial Services Authority publishes new mortality improvement assumptions used for valuation Hedging mortality and longevity risks o Allows diversification credits for companies hedging these risks o Not perfect hedge unless mortality and longevity risk is on same life o Mortality risk centered in middle age o Longevity risk focused on older age continued 6

8 Managing longevity risk insurance/reinsurance Traditional solution has been to transfer the risk to insurance or reinsurance companies Bulk annuity o Transfers both investment and longevity risk o Buy out (divestiture of all or part) o Buy in (infusion of capital) structure most popular structure o Requires upfront premium, immediate recognition of loss (premium > current reserve) Swap (buy in) o Transfers only longevity risk o Third party payments based on actual realized mortality or indexed population o Pension fund/annuity provider makes fixed payments o Counterparty matches pension or annuity payments for as long as individual lives o No upfront premium, potentially no immediate impact on balance sheet British Telecom Prudential Ins Co of America July 2014 o 16 billion (approx $24.8 billion) o Pension fund customized longevity swap continued 7

9 Managing longevity risk insurance/reinsurance Insurer/ Reinsurer Floating Cash Flows Fixed Cash Flows Indemnity Insurance Annuitants ts Floating Cash Flows Pension Plan/Insurer OR Floating Rate Fixed Rate Index Swap Pension fund/annuity provider makes fixed payments Counterparty matches pension or annuity payments for as long as individual lives; payments based on actual realized mortality or indexed population continued continued 8

10 Managing longevity risk pension risk transfer (PRT) Pension plan purchases group annuity contract o One large transaction o Pension plan no longer liable for payments or administration o Retirees receive annuity contract/certificate; direct contact to insurance company o In US these are buy outs, in UK these are buy ins Insurance company issuing annuity may purchase reinsurance o Usual quota share or excess Different from longevity swap continued 9

11 Managing longevity risk capital markets Insurance and/or reinsurance limited capacity Capital markets offer relief from concentration in the supply of longevity protection Capital market incentive is longevity is largely uncorrelated with typical capital market risks; offers a diversifying investment opportunity Potential misalignment of incentives between parties looking to hedge longevity risk and investors o Pension funds and annuity providers want to be fully protected against longevity risk o Investors want certain understanding of underlying risk Aegon Societe Generale December 2013 o 1.4 billion capital market transaction (approx $1.8 billion) o Aegon Netherlands pension business continued 10

12 Managing longevity risk government longevity bond Little to no counterparty risk compared to private sector o Increases capital relief insurance and/or reinsurance companies receive from such a hedge Better positioned to offer hedge in line with long term duration of longevity risk Better position to support systemic longevity risk Benefit to government is lower cost of borrowing compared to traditional government bonds o Receives premium for taking on longevity risk o Illiquidity of bond market not certain to reduce cost of borrowing Many government s already hold longevity risk on their balance sheets from public pensions and health programs (e.g., PBGC in US) 11

13 Recent longevity swaps and longevity risk transfer transactions 2015 (=> 1B; 1B) Fund/Sponsor Provider(s) Solution Size Date Philips UK Pension Fund Newcastle Pension Plan Pension Ins Corp & Hannover Re Friends Life plus Swiss Re Buy out & longevity reinsurance Longevity swap * reinsurance 2.4 billion Nov billion Sep 2015 Legal & General Prudential Longevity reinsurance 2.9 billion Aug 2015 AEGON Canada Life Re Longevity swap & reinsurance 6 billion Jul 2015 AXA UK Pension Scheme RGA Re Longevity swap 2.8 billion Jul 2015 Pension Insurance Corp Delta Lloyd Bell Canada Pension Plan (BCE Inc.) Prudential Insurance Company of America RGA Re Sun Life Financial, SCOR & RGA Re Longevity reinsurance 1.6 billion Jun 2015 Index based longevity derivative (swap) Longevity swap & reinsurance 12 billion Jun 2015 CAD$5 billion Mar 2015 Scottish Power Abbey Life Longevity swap 2 billion Feb 2015 MNOPF Pacific Life Re Longevity swap & reinsurance 1.5 billion Jan

14 Recent longevity swaps and longevity risk transfer transactions 2014 (=> 1B; 1B) Fund/Sponsor Provider(s) Solution Size Date Rothesay Life Pacific Life Re Longevity reinsurance 1 billion Dec 2014 Legal & General Prudential Longevity reinsurance $2.2 billion Oct 2014 Delta Lloyd RGA Re Index based longevity derivative (swap) 12 billion Aug 2014 Rothesay Life Prudential Longevity reinsurance 1 billion ($1.7 billion) Aug 2014 BT Pension Scheme Total UK Pension Plan Royal London AkzoNobel Aviva Prudential Insurance Company of America Pension Insurance Corporation/Hannover Re RGA International Reinsurance Co Legal & General/Prudential Swiss Re/Munich Re/SCOR Pension customized longevity swap Buy in and longevity reinsurance 16 billion Jul billion Jun 2014 Longevity reinsurance 1.6 billion May 2014 Buy in, bulk annuity, longevity reinsurance Pension customized longevity swap 3.6 billion Mar billion Mar

15 Recent longevity swaps and longevity risk transfer transactions 2013 (=> 1B; 1B) Fund/Sponsor Provider(s) Solution Size Date BAE Systems Astra Zeneca Carillion AEGON Pension Insurance Corporation EMI Group Pension Fund Legal & General Deutsche Bank/ Abbey Life Deutsche Bank/ Abbey Life Société Générale CIB/SCOR Pension customized longevity swap Pension customized longevity swap Pension customized longevity swap Longevity swap to capital market investors and reinsurers 1.7 billion Dec billion Dec billion Dec billion Dec 2013 Reinsurers Longevity reinsurance 1.4 billion Nov 2013 Pension Insurance Corporation Buy out of all liabilities 1.5 billion Jul 2013 Abbey Life/Rothesay Life Hannover Re Longevity reinsurance 1 billion Apr 2013 BAE Systems Legal & General/Hannover Re Pension customized longevity swap 3.2 billion Feb

16 Presenter Contact Information Larry N. Stern, FSA, MAAA Canterbury Consulting (704)