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UK longevity market 'nowhere near' capacity, says L&G

UK - The UK market’s appetite for longevity deals remains strong despite a raft of recent deals, according to Legal & General (L&G).

Head of business development Tom Ground said 2011 was probably the best year the UK longevity market had seen to date - with a number of large deals being agreed for corporate schemes, such as Rolls-Royce and broadcaster ITV.

But he insisted capacity for growth remained.

“I’m not sure we are anywhere near being at capacity at the minute,” he said. “There has also been a whole series of reinsurers entering the market - I’m not sure everyone who could be in the market is in the market.”

However, Ground noted the complexity of a number of last year’s deals, with most being bespoke for each scheme.

“The large schemes, by their very nature, create quite a bit of complexity - a lot of the banks, for example, want to have multiple exit points,” he said, noting that the Rolls-Royce deal was one such contract negotiated with several break clauses.

He said L&G was now looking to treat longevity swaps no differently from buy-in and buyout transactions, initially taking each deal’s risk onto its own balance sheet.

“We are perfectly comfortable adding that to our balance sheet each year - we put it out to insurers when we want to,” he said.

Ground likened the company’s strategy to taking a pay-as-you-go approach to bulk annuity contracts, arguing that the process was “much simpler” when reinsurers were not involved from the outset.

“If you think about the Rolls-Royce transaction,” he added, “they were trying to get eight different parties lined up on the same day with collateral accounts, while we can sign the contract as quickly as we can run it through our postcode model.”

Asked about the possibility of a tradable longevity market - which Hymans Robertson previously said was being held back by the lack of sufficient indices to reflect the country’s population - Ground said a lot of work was being put into developing the proposition, but that it simply had not yet materialised.

Ground’s colleague Joseph Lu, a longevity expert at L&G, recently expressed his surprise at a report that found the gap in longevity between high and low earners in the UK was growing rather than shrinking.

Speaking of the Longevity Science Advisory Panel’s recent paper ‘Past and future variations by socioeconomic groups in England and Wales’, Lu said: “With various governments actively trying to reduce the differences between the rich and poor, it had been expected that the gap in life expectancy between pensioners in different socioeconomic circumstances would narrow to some extent.”

He said it was of “extreme interest” that the report revealed the opposite.

“This finding has a significant impact on current industry annuity pricing models,” he said.

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