Awards 2012: Best reinsurer, longevity/mortality risk transfer: Swiss Re

Swiss Re has been a pioneer when it comes to the global issue of funding longer lives and has established a formidable track record in delivering longevity solutions.

In May 2012, the reinsurer completed a longevity insurance transaction with a pension fund of the Dutch company AkzoNobel, the largest global paints and coatings company and a major producer of speciality chemicals. In this transaction, Swiss Re agreed to cover the longevity risk on pensioner liabilities of £1.4 billion.

The AkzoNobel deal was Swiss Re’s first longevity swap transaction with a corporate pension plan.

The transaction contained some innovative features, but also played a major contribution in securing confidence in the longevity market in 2012 given the withdrawal of some banks from the sector.

“The transaction proves there is a way forward in the $20 trillion longevity market and that reinsurers will continue to be seen as a natural home for longevity risks. Swiss Re is the only reinsurer to date to have successfully developed the expertise to offer longevity solutions directly to pension plans in the UK,” says Costas Yiasoumi, head of longevity solutions at Swiss Re Corporate Solutions, in London.

The transaction was structured as a longevity insurance contract in which Swiss Re set an annual premium schedule over the next 60 years in relation to the pension scheme’s 17,000 current pensioners and their contingent dependants. In return, Swiss Re will reimburse the scheme each year for the actual pensions paid until the last member dies.

Premiums and claims automatically adjust for future data changes on guaranteed terms. The premium and claims legs are linked to actual pension plan indexation; claims and premiums are netted off, set annually, but settled monthly.

A key feature of the transaction is the collateral requirement. Only large movements in longevity expectations are collateralised, so neither party is expected to post collateral on ‘day one’ and collateral is only posted periodically (i.e. not daily).

Yiasoumi comments: “In pension plan transactions, it has become common to use collateral as a way of offering comfort in terms of counterparty exposure. The AkzoNobel transaction includes a bespoke collateral mechanism, which recognises the long-term nature of longevity risk and the fact that the counterparty is a pension plan.”

Another feature was that while the premium schedule covers a 60-year period the longevity protection extends until the last covered individual dies. The contract terminates once claims reach a de minimis level at which point a lump sum is paid representing the future remaining payments.

This means the transaction covers the pension plan’s exposure extremely closely, so the client has not had to compromise on the level of the cover, says Yiasoumi. “The benefits structure has not had to be simplified, so there will not be a mismatch between their cover and their exposure.”

He adds: “It comes down to us being a balance sheet holder. If you are writing the risk and passing it on to other parties, then compromising on some of the benefits to make the structure simpler will make it easier to pass the risk down the chain.”

Unlike other transactions in which investment banks or primary insurers have passed the longevity risk to reinsurers sitting behind them, Swiss Re retained all of the exposure on its own balance sheet as at the completion date of the contract. None has been passed to other insurers or investors.

Swiss Re has a track record of developing the longevity market. In 2007, it pioneered the longevity hedge market with its benchmark transaction with Friends Provident. In 2009, Swiss Re showed that public sector pension plans are also able to transfer their longevity risk, closing a £1 billion longevity insurance contract for the Royal County of Berkshire Pension Fund.

In 2010, the reinsurers issued $50 million of longevity trend risk bonds to the capital markets through the Kortis Capital securitisation programme.