| LONDON, Sept 24
LONDON, Sept 24 Insurers do not have enough
capacity to cover some $23 trillion in global pension
liabilities against the risk that people will live longer than
expected and should seek to pass such longevity risk through to
investors, Swiss Re said on Monday.
In a report, the world's No.2 reinsurer said each additional
year of life expectancy raises pension costs by about 4-5
percent, adding to the burden on pension funds and insurers.
Pension funds looking to minimise their exposure to an aging
population have often used longevity swaps, through which a
counterparty - often a reinsurer - takes on their liabilities
for a defined period. If pension payments fall short of
trustees' estimates, the counterparty pockets the difference,
but must pay out if they overshoot.
But capacity within the reinsurance industry is running
short and a capital markets-based solution needs to be found
before reinsurers are unable to take on more longevity risk,
Swiss Re said.
It suggested longevity risk should be packaged up and sold
to investors in much the same way that insurers lay off risks
from natural disasters such as hurricanes and earthquakes via
the catastrophe bond market. Bonds issued by the government and
with coupons linked to tax revenues could be another solution.
"A reliable and widely accepted benchmark index will be
needed," Swiss Re said in the report.
Appetite for catastrophe bonds has increased, partly
reflecting their perceived lack of correlation with other
financial markets, and issuance this year could be the highest
since the market began in the early 1990s, investors say.
But longevity is tricky to price, with investors, pension
funds and investment banks needing to agree on a forward
projection of the cash flows related to either a population
index or a specific pension block.
Capital markets investors have so far given a tepid response
to the idea of a tradeable market in longevity risk, often
disagreeing with pension funds' mortality assumptions.
Investors also tend to prefer shorter-term commitments than
the 30-40 years a longevity transaction would require.
Swiss Re sold the first ever tradable rated security
providing protection against longevity risk in December 2010.
The $50 million eight-year catastrophe bond, sold via a
special-purpose vehicle, Kortis Capital, passed on Swiss Re's
longevity risk direct to capital markets investors.
The recently formed Life & Longevity Markets Association has
published longevity indices, which could provide a reference for
future transactions in England, Wales, Germany, the Netherlands
and the United States.
But "it will take time before these indices are used
widely", Swiss Re said.
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(Reporting by Sarah Mortimer; Editing by Catherine Evans)