Longevity Policy Committee

Sacha Dhamani

Since 2009 the size of the secondary longevity market has increased materially. Significant volumes of longevity liability have been removed from direct insurers and pension schemes and have ultimately been placed with reinsurers.

The significant pricing advantage reinsurers have over traditional players is largely due to the size of their casualty and mortality risk exposures. Longevity risk diversifies against these risks (and in the latter case potentially provides a hedge against the risk) such that the capital cost of writing longevity risk is lower than for the ceding insurance companies. For pension schemes there has been a greater appreciation of the risk and increased appetite to de-risk both asset and liability risks at the acceptance of increased cost and reduced return.

The reinsurance capacity in the secondary longevity market is expected to remain sizeable in the short term, but in the medium to longer term this capacity may diminish. As reinsurers increase their longevity risk exposure, the diversification benefit will reduce and so their pricing advantage may reduce, which, all other things being equal, would result in an increased cost of reinsurance for

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