Longevity risk - opalliance.org.uk · Longevity Update| 16 October 2014 Uncertainty about the...
Transcript of Longevity risk - opalliance.org.uk · Longevity Update| 16 October 2014 Uncertainty about the...
Longevity risk Steven Rimmer OPA meeting, 16 October 2014
Longevity Update| 16 October 2014
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Life expectancy continues to increase
Life expectancy has increased by about three months every calendar year
Source: OECD Health Data 2012
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1995 2000 2005
Life expectancy (males, age 65)
Canada
Netherlands
Switzerland
United Kingdom
United States
Longevity Update| 16 October 2014
Longer retirements and shorter working lives
Retirement
Employment
Childhood/Education
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Longevity Update| 16 October 2014
Fewer working age individuals relative to retired
United Nations, World Population Prospects – 2012 Revision
"Support ratio" Number of people of working age (20 to 64)
relative to number of retirement age (65 and over)
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Longevity Update| 16 October 2014
Recent UK experience – males, 65 and over
Source: Chris Shaw, "Fifty years of United Kingdom National Population Projections: How Accurate Have They Been?" Population Trends, 128, ONS, 2007 5
Longevity Update| 16 October 2014
Uncertainty about the future
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Lif
e e
xpe
cta
ncy
at
bir
th (
yea
rs,
ma
le)
Observed 1971 1973 1975 1977
1979 1981 1983 1985 1987
1989 1991 1992 1994 1996
1998 2000 2002 2004
Projection originated in
Source: Chris Shaw, "Fifty years of United Kingdom National Population Projections: How Accurate Have They Been?" Population Trends, 128, ONS, 2007
It is not possible to predict future life expectancy with any certainty
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Possible approaches to managing longevity risk
Change liabilities
Direct hedge Accept
Longevity risk
Pass on cost Indirect hedge
• Longevity insurance
• National indices • Bulk annuity
Longevity insurance National index Bulk annuity
• Complete longevity risk transfer
• Investments remain in pension scheme
• Partial longevity hedge • High basis risk (eg
difference national and scheme populations)
• "Pre-payment", ie assets are transferred to provider
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Result: future pension cash flows are uncertain
2013
An
nu
al p
en
sio
n p
aym
en
ts Scenario 1: longer lifespans
Scenario 2: shorter lifespans
Pension scheme actuary's estimate
Scenario 1: Illustrative increased annual pension payments if longevity gets longer
Scenario 2: Illustrative lower annual pension payments if longevity gets shorter
Uncertainty around longevity makes it difficult for trustees and sponsoring employers to budget and invest
Longevity Update| 16 October 2014
Provider
Key features of longevity insurance
Pension scheme
Premiums
Claims (= Pension payments)
Pension payments
Pensioners
• No initial cash outlay. Assets stay in the pension scheme
• Premiums set at outset. Linked to actual pension increases. Netted against claim payments
• Pension scheme maintains relationship with the pensioners. Benefits are not altered
• Complete longevity risk transfer for actual scheme population. Also covers other demographic risks
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Longevity insurance
2013
An
nu
al p
en
sio
n p
aym
en
ts
Certainty The pension plan pays the same fixed premium payments
regardless of changes in longevity
Swap Format The provider covers the cost if longevity increases
and gains if longevity decreases
Scenario 1: Net difference paid by the provider to the pension scheme
Scenario 2: Net difference paid by the pension scheme to the provider
Annual premiums
Scenario 1: Illustrative increased annual pension payments if longevity gets longer
Scenario 2: Illustrative lower annual pension payments if longevity gets shorter
Longevity Update| 16 October 2014
Reinsurers have a strong rationale to hold longevity risk on balance sheet
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Diversification
Longevity risk is a small part of the overall insurance portfolio
Longevity uncorrelated to other exposures
Opposite peril
Consolidator
Already covering hundreds of thousands of individuals in pension plans and annuity books for longevity
Significant exposure to mortality risk
Swiss Re's diverse range of business
Figures relate to premiums earned in 2013 Source: Swiss Re 2013 annual results
Administration of closed life insurance books
5%
Life and health reinsurance
35%
Direct corporate insurance
10%
Property (eg housing, commercial) and casualty
(eg third party motor,
employer liability)
reinsurance 50%
A global diversified reinsurer has the diversification, mortality exposure and consolidation role allowing it to hold longevity risk on its balance sheet
Longevity Update| 16 October 2014
Reinsurer
Reinsurer Group
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Outline of approaches to accessing reinsurance capacity
Trustees Bank SPV
Bank Group Sponsor Group
Derivative Transformer
Trustees Insurance carrier Reinsurer Insurance policy Reinsurance agreement
Sponsor Group Reinsurer Group
Trustees Insurance carrier Reinsurer Insurance policy Reinsurance agreement
Sponsor Group Reinsurer Group Insurer or Bank Group
Reinsurance agreement
Longevity Update| 16 October 2014
Reinsurer
Reinsurer Group
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Outline of approaches to accessing reinsurance capacity
Trustees Bank SPV
Bank Group Sponsor Group
Derivative Transformer
Trustees Insurance carrier Reinsurer Insurance policy Reinsurance agreement
Sponsor Group Reinsurer Group
Trustees Insurance carrier Reinsurer Insurance policy Reinsurance agreement
Sponsor Group Reinsurer Group Insurer or Bank Group
Reinsurance agreement
Longevity Update| 16 October 2014
UK corporate pension longevity transactions
Babcock International Credit Suisse GBP 1.2bn Reinsurance market
RSA Rothesay Life GBP 1.9bn Reinsurance market
Royal County of Berkshire GBP 1.0bn Swiss Re
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BMW Deutsche Bank (Abbey) GBP 3.0bn Reinsurance market
British Airways Rothesay Life GBP 1.3bn Reinsurance market 20
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ITV Credit Suisse GBP 1.7bn Reinsurance market
British Airways Rothesay Life GBP 1.3bn Reinsurance market
Pilkington GBP 1.0bn Legal & General Reinsurance market
Rolls-Royce Deutsche Bank GBP 3.0bn Reinsurance market
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AkzoNobel GBP 1.4bn Swiss Re
LV= GBP 0.8bn Swiss Re
BAE Systems GBP 3.2bn Legal & General Reinsurance market
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Bentley Motors
Carillion
AstraZeneca
BAE Systems
Deutsche Bank (Abbey)
Deutsche Bank
Deutsche Bank
Legal & General
Reinsurance market
Reinsurance market
Reinsurance market
Reinsurance market
GBP 0.4bn
GBP 1.0bn
GBP 2.5bn
GBP 1.8bn
Aviva GBP 5bn Swiss Re / reinsurance market
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BT GBP 16bn Reinsurance market
Phoenix Life GBP 0.9bn Reinsurance market
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Thank you
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Confidential
International Vision | 8 October 2014
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©2014 Swiss Re. All rights reserved. You are not permitted to create any modifications or derivative works of this presentation or to use it for commercial or other public purposes without the prior written permission of Swiss Re.
The information and opinions contained in the presentation are provided as at the date of the presentation and are subject to change without notice. Although the information used was taken from reliable sources, Swiss Re does not accept any responsibility for the accuracy or comprehensiveness of the details given. All liability for the accuracy and completeness thereof or for any damage or loss resulting from the use of the information contained in this presentation is expressly excluded. Under no circumstances shall Swiss Re or its Group companies be liable for any financial or consequential loss relating to this presentation.
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Recent UK experience – females, 65 and over
Source: Chris Shaw, "Fifty years of United Kingdom National Population Projections: How Accurate Have They Been?" Population Trends, 128, ONS, 2007 18