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IPE special report May 2018

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Longevity market's scale 'too vast' for insurers alone

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  • Longevity market's scale 'too vast' for insurers alone

GLOBAL - The development of a capital market for longevity risk will be "vital" if capacity to meet demand, according to a report by Swiss Re.

In 'A mature market: Building a capital market for longevity risk', the reinsurer notes that, globally, non-life related assets only account for around 10% of the $23trn (€18trn) in estimated defined benefit assets.

"Society's longevity risk could be tackled to a greater extent if reinsurers were able to expand their capacity, and this could be done by encouraging capital market investors to invest in longevity instruments," the report said.

It also examined how the establishment of a tradable longevity market could come about, examining the growth of UK inflation-linked corporate bonds in the wake of the country's decision to increase pensions in line with longevity, and the establishment of the insurance-linked securities (ILS) market.

"Inflation and ILS demonstrate that developing a market takes time and there are obstacles to overcome," the report continued.

"The main challenges include achieving transparency in measuring the risk and potential liability, building a secondary market, increasing investor education, providing the right level of return and regulation."

It pointed towards the launch of the Life and Longevity Markets Association as a step in the right direction, but said it would take time for the published longevity indices - covering part of the UK, the Netherlands, Germany and the US - became widespread.

Alison Martin, Swiss Re's head of life and health reinsurance insisted the development of a secondary market was "vital" in the long-term. 

"As the scale of the risk is so vast, capacity is unlikely to meet the future demand for longevity products without a capital market," she said.

However, not all are convinced of the capital market's ability to trade longevity successfully, with several investor comments contained within the report.

Andrea Cavalleri of Securis Investment Partners said he was doubtful about the emergence of a tradable market, noting the problem posed by price.

"For a market to develop, prices need to show a good value both for the investors as well as the sponsor of the deal," he said.

"The prices offered currently do not reflect the true extent of the underlying longevity risk, and therefore there is a gap between what sponsors are willing to pay and what investors expect to earn for taking the risk."

The report countered that longevity risk was already part of most companies' risk management due to their pension obligations.

"By bringing longevity instruments into their portfolio, they would not necessarily expose themselves to a new risk," it said.

"Instead, their exposure to longevity risk would become more transparent, especially if the instrument is linked to an established index.

"In this sense, longevity instruments could be an alternative to other income-paying asset classes such as corporate bonds. Investors could use them to enhance their returns and/or optimise their portfolio structure depending on needs such as diversification."

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