Aegon has reinsured the longevity exposure of 257,341 Dutch pension insurance contracts with Reinsurance Group of America. The insurance firm has taken the step to free up capital.
The deal is comparable to a 2019 transaction, when Aegon reinsured another part of its longevity exposure with Canada Life Reinsurance. Aegon has now reinsured 40% of the longevity risk of its Dutch pension insurance portfolio.
Operating capital generation of the firm’s pension business will initially be reduced by €40m per year while the operating result will decrease “by less than €15m per year,” according to Aegon.
“The impact on operating capital generation and the operating result will decrease over time in line with the maturity of the reinsured portfolio,” the firm said in a press release.
The transaction involves 257,342 pension insurance contracts and €7bn in pension liabilities. It concerns both current and future pensions as well as partner pensions, an Aegon spokesperson said.
The reinsurance of longevity risk has no consequences for the pension savers in question, since Aegon retains responsibility for paying out the accrued pensions.
“But by shifting longevity risk to another firm you introduce a new risk,” said Jeroen Koopmans of consultancy LCP.
He added: “If the firm that has taken on the longevity risk goes bankrupt, Aegon would have a problem in case the pension savers concerned live much longer than expected. After all, Aegon would have to again shoulder the longevity risk by itself then.”
The existence of counterparty risk led regulator DNB to introduce additional conditions to concluding reinsurance contracts in 2019. Since then, DNB requires insurance firms to provide an overview of potential losses if the reinsurance firm that’s the counterparty of a transaction goes bust.
An Aegon spokesperson told IPE via email that DNB has been involved “in every step of the process, even though the transaction did not require formal approval” by the regulator.
The reinsurance transaction improves the solvency ratio of Aegon’s life business by 15 percentage points. “As such, it creates space for an insurance firm to do other things,” Koopmans said.
Aegon declined to comment on what it intends to do with the additional capital it has now at its disposal. The firm could increase the risk of its investment portfolio in order to make higher returns, or it could use the capital to do buy-outs.
Buy-outs are increasing in popularity among both pension funds and insurance firms in the Netherlands.