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BIS calls for feedback on longevity-risk transfer market

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  • BIS calls for feedback on longevity-risk transfer market

GLOBAL – The Bank for International Settlements (BIS) has called for input from investors and other market participants on the longevity-risk transfer market with the view to avoiding a "breakdown" in the risk-transfer chain at a time when pension funds look increasingly at de-risking solutions.

The BIS released a consultation paper on longevity-risk transfer markets in which it stresses that total longevity risk is "significant" when measured from a financial perspective.

In its paper, the BIS estimates that the total global amount of annuity and pension-related longevity risk exposure ranges from $15trn (€11.2bn) to $25trn.

"To manage this risk, pension funds in some countries are increasingly looking to transfer their longevity risk," it says.

"There are basically three types of transactions being used to transfer longevity risk that differ in terms of the types of risk transferred and the types of risk created: buy-in, buyout and longevity-swap transactions."

The BIS went on to say that, while longevity-risk transfer markets are not "sizeable enough" to present immediate systemic concerns, their "massive" potential size – and growing interest from investment banks to mobilise this risk – make it important to ensure these markets are safe, both on a prudential and systemic level.

The organisation makes a number of recommendations.

First, it calls on supervisors to communicate and cooperate internationally and across sectors to reduce regulatory arbitrage.

It adds that supervisors should also seek to ensure holders of longevity risk under their supervision have the appropriate knowledge, skills, expertise and information to manage it.

In a third point, the BIS stresses that policymakers should review their explicit and implicit policies with regards to where longevity risk should reside.

"They should also be aware that social policies may have consequences on both longevity-risk management practices and the functioning of longevity-risk transfer markets," the BIS says.

According to the organisation, policymakers should also review rules and regulations pertaining to the measurement, management and disclosure of longevity risk and ensure institutions taking on longevity risk are able to "withstand unexpected, as well as expected" increases in life expectancy.

Additionally, policymakers should closely monitor the market between corporates, banks, reinsurers and the financial markets, including the amount and nature of the longevity risk transferred.

To that extent, the BIS warns that longevity swaps might expose the banking sector to longevity tail risk, possibly leading to risk transfer chain breakdowns.

The BIS lastly recommends policymakers to support the compilation and dissemination of more granular, up-to-date longevity and mortality data relevant for the valuations of pension and life insurance liabilities.

Market participants wishing to comment on the report have until 18 October to submit their responses.

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