A year ago Prudential Financial won Insurance Risk’s award for best reinsurer for its work on a £16 billion ($27.7 billion) longevity transfer for British Telecom’s pension scheme. The firm wins again this year, but this time for work that is similar but also fundamentally different – reinsuring longevity risk but, this time, for insurers.
Since July 2014, Prudential has completed six transactions for UK insurers including L&G, Rothesay Life and Pension Insurance Corporation, providing longevity reinsurance that covers more than $10 billion (£6.5 billion) in pension liabilities.
L&G’s $2.2 billion transfer and Rothesay’s $450 million deal can both be attributed to the insurers’ wish to free up capacity to write more bulk annuity business, particularly after Solvency II comes into force in January. In the first half of 2015, L&G wrote ($1.7 billion) of bulk annuity business representing about a fifth of all business written in the market to date.
Under the Solvency II standard formula insurers must hold enough capital to cover a 20% drop in mortality rates. That could threaten to constrain UK insurers who have little mortality risk on their books to balance against back-books of annuity business. At the same time, transferring longevity risk to third parties has helped UK firms clean up matching adjustment portfolios to secure regulatory approval.
“By buying indemnity reinsurance on longevity, UK firms have been able to remove the uncertainty that longevity risk adds on the liability side and improve the effectiveness of the matching adjustment,” says Amy Kessler, head of longevity risk transfer at Prudential, based in New Jersey.
By buying indemnity reinsurance on longevity, firms have been able to improve the effectiveness of the matching adjustment
Comparing direct indemnity reinsurance with index-based longevity swaps, the indemnity option removes more risk and improves the certainty of matching cash-flows to gain matching adjustment compliance, she says.
“With index swaps there is basis risk between the index and policyholders. That is unlikely to be accepted by the Prudential Regulation Authority as suitable for the matching adjustment. Longevity reinsurance has allowed UK firms to convert potentially uncertain liabilities into liabilities where it is easy to know what cash-flows to match with assets.”
Although attractive pricing is crucial, Bill McCloskey, vice-president of longevity risk transfer at Prudential says most firms choose to do business with Prudential because of its ability to execute transactions at any size or level of complexity.
“It is hard to remember many transactions where we have been the cheapest option. But [success] is down to our expertise and ability to deploy capital. None of our competitors is able to deploy a team of 45 experts, for example, to see a transfer over the finish line,” McCloskey says.
Taking on longevity risk also makes sense for Prudential, which can balance UK longevity risk with offsetting mortality risk on its books. That capacity has proven an irresistible opportunity for UK firms ahead of Solvency II.