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Direct reinsurance contracts 'new norm' for longevity swaps, says PICA

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UK pension schemes transacting directly with global reinsurance companies for longevity risk is the new norm after 2014 saw a number of deals avoiding intermediary firms.

The comments come from the Prudential Insurance Company of America (PICA), the reinsurance company that directly transacted with the BT Pension Scheme (BTPS) in its record-breaking £16bn (€20.1bn) deal last summer.

Senior vice-president and head of longevity reinsurance at PICA, Amy Kessler, said the firm had not seen any deals come through the more traditional primary insurer intermediated structure, as UK pipelines continued to flood the reinsurance market.

Consultancy Towers Watson went on to to create an offshore ‘ready-made’ captive insurance cell allowing pension schemes to access the reinsurance market directly, after assisting the £40.2bn BTPS to set up its own insurance company.

Reinsurers traditionally only transacted with primary insurance companies or banks, which acted as intermediary firms for pension schemes, but added fees and used several reinsurers to limit credit and exposure risks – increasing costs.

Kessler told IPE the pace at which the UK market shifted to the new structure was surprising with all new deals taking on this form.

“We haven’t seen any longevity-only deals coming in more traditional intermediated structures,” she said.

Kessler also said she had initially perceived the captive cell solution to be one for much larger pension funds.

However, given the way the market developed, she accepted her original few was wrong.

“With the right kind of support and the system, it could be for smaller pension funds, and we are seeing that,” she added.

The £2.3bn Merchant Navy Officers Pension Fund (MNOPF) completed a £1.5bn longevity swap with Pacific Life Re using the Towers Watson platform in January, which Kessler said demonstrated the options available to smaller schemes.

“There are a lot of similarities between BTPS and MNOPF,” Kessler said. “The biggest difference was BTPS was first and therefore had to develop the solution as first mover.

“When MNOPF transacted, the capabilities, path, structure and a lot of challenging questions had been addressed.”

She added: “The question is whether smaller funds would find this daunting, but MNOPF proved the management, effort and governance to manage a deal over its life did not dissuade funds. The pipelines are filling up with [£1bn-2.5bn] in smaller deals.”

Kessler also said the pipelines for longevity risk from the UK were significant, and while there was no material increase in pricing as of yet, this would happen down the line.

Reinsurers are quoting on three fronts including pension schemes engaging in longevity swaps, primary insurers passing off longevity risk from the bubbling UK bulk annuity market, and insurers re-insuring back-books of longevity risk as Solvency II requirements come into force.

“The pipeline is very robust on all three fronts,” she said.

“For the next 18 months, there is a special impetus for insurers to [reinsure the back-book of risk]. After the wave of UK insurers tapping into the reinsurance market, I would expect to see other European insurers.”

According to consultancy LCP, the UK longevity swap market hit £21.9bn in 2014 led by BTPS and the Aviva Staff Pension Scheme’s (ASPS) £5bn transfer with Swiss Re, Munich Re and SCOR Global Life.

The ASPS used sponsor and insurer Aviva to access the market directly, as only £900m was passed on using intermediary Phoenix Life.

LCP said £3.5bn of longevity risk had been transferred from schemes to reinsurers in 2015, all using captive cells to access the market directly.

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