Close Menu
    What's Hot

    Morrisons Retirement Saver Plan Completes Bulk Purchase Annuity Buy-In With Aviva

    28 May 2025

    Yellow Pages Limited Purchases Group Annuity Contracts From BMO Life Assurance Company

    22 May 2025

    Life ILS Conference 2025

    20 May 2025
    Facebook X (Twitter) Instagram
    Instagram LinkedIn X (Twitter)
    Life Risk News
    • Home
    • Features

      New Data Shows the Extent to Which American Seniors Are Missing Out by Lapsing or Surrendering their Life Insurance Policy

      14 May 2025

      Buy-Ins To Buy-Outs Appear Stalled As Deal Complexity, Administration Resources Pose Obstacles

      14 May 2025

      Is Servicing an Overlooked Source of Life Settlement Alpha?

      14 May 2025

      Q&A: Shelly Beard, Managing Director, WTW

      14 May 2025

      Longevity Tech to Emerge as Distinct Sub-Sector of Venture Capital Market?

      14 May 2025
    • Commentary

      UK Life Insurers to Benefit from Robust Bulk Annuity Market in 2025

      14 May 2025

      The Power of Uncorrelated Diversification During Market Volatility

      14 May 2025

      Overseeing BPA Growth Safely

      14 May 2025

      Could Climate Change Cause the Buy-In Market To Collapse?

      10 April 2025

      ICS vs Solvency II: Comparing Risk Corrections for Illiquid Liabilities

      10 April 2025
    • Events
    • Magazine
    • News

      Morrisons Retirement Saver Plan Completes Bulk Purchase Annuity Buy-In With Aviva

      28 May 2025

      Yellow Pages Limited Purchases Group Annuity Contracts From BMO Life Assurance Company

      22 May 2025

      Andrew Limited Pension and Life Assurance Plan Completes Bulk Annuity Transaction With Aviva

      15 May 2025

      Life Insurance Settlement Association Publishes Latest Market Data Collection Survey Results

      13 May 2025

      UK Aggregate Defined Benefit Pension Fund Surplus Down Again in April

      12 May 2025
    Subscribe
    Life Risk News
    Home » Is a Digital Exchange the Solution to the Investor Participation in Longevity Risk Transfer Conundrum?

    Is a Digital Exchange the Solution to the Investor Participation in Longevity Risk Transfer Conundrum?

    Features 8 February 2023Greg WintertonBy Greg Winterton
    Twitter LinkedIn Email
    Exchange
    Share
    Twitter LinkedIn Email

    Partly fuelled by rising interest rates in 2022, Defined Benefit (DB) pension funds are increasingly looking to the pension risk transfer market to provide more certainty to the current and future pensioners who are members of their plan. But there are benefits to plan sponsors, too; pension liabilities can be a drag on company performance, so the option to essentially wind up the scheme is an attractive one.

    This ‘win-win’ has fuelled the growth in the pension risk transfer industry in the past decade. The UK has the world’s most active and developed market, but meaningful volumes take place in the US, Canada, and the Netherlands as well. Three different types of risk transfer are available, with a full buy-out – where an insurance company absorbs the entire pension scheme, including the assets and the administration as well as the longevity risk – being the holy grail.

    The problem is, on a long-term basis, some would argue that there isn’t enough capacity for insurance companies to absorb the entire market because accumulating more and more longevity risk – there is approximately £1.5trn of DB pension liabilities in the UK alone, according to consulting firm WTW – without hedging it means that pensioners and governments will be exposed to much higher risk in the event of a default. Whilst insurance companies can de-risk themselves with other insurance and reinsurance companies, that’s not sustainable for the industry as a whole, and so there needs to be another place for insurers and reinsurers to transfer longevity risk.

    Enter the capital markets, including hedge funds, speciality asset managers, and other institutional investors. These players have been studying the market for decades and are eager to participate due to the uncorrelated nature of the risk. But before they can get in, they need a much more systematic process, according to Avery Michaelson, CEO at the longevity risk trading marketplace, Longitude Exchange.

    “In order for hedge funds and other institutional investors to get involved in the longevity market, they need a marketplace. Currently, transactions are brokered in an over-the-counter process using transaction formats that aren’t well suited to the investment criteria of these players,” he said. “These investors benefit from a certain level of commoditisation of transactions, something which can be addressed with index-based transaction formats. By basing transaction pay outs on general-population mortality data, information asymmetries can be removed along with much of the analytical complexity involved in pricing and risk analysis.”

    The hedge fund industry could be a natural home for these products, as they structurally look like an alternative fixed income product. However, for them to really commit capital to the space, the issue of liquidity needs to be addressed. Here again is where an exchange can serve the markets’ need by providing a digital marketplace for trading.

    Michaelson sees the market expanding rapidly in the coming years, both in terms of volumes and participants.

    “Rising interest rates have further accelerated pension de-risking, fuelling greater than ever demand for capital. Fortunately, there are already a number of ILS Funds with experienced life risk teams prepared to commit capital to this space. They will be joined by a much broader range of institutional investors as deal flow and liquidity materialize.”

    The alternative investment industry manages trillions of dollars. Data and analytics provider Preqin says that, at the end of June 2022, the private equity industry managed $7.97trn, the hedge fund industry $4.13trn, and the real estate market £1.5trn for example. A more developed longevity market would be large enough to stack up against these established markets.

    “There are around $100trn of longevity linked liabilities, globally. And every year of unanticipated life expectancy adds around 5% to liabilities. So, if estimates are off by three years, longevity risk could cause $15trn of unfunded liabilities,” said Michaelson. “The enormous quantum of this risk points to the need for capital markets participation. It’s only a matter of time before longevity risk is recognized as its own asset class.”

    2023 - February Longevity and Mortality Trends Volume 2 Issue 2 - February 2023
    Share. Twitter LinkedIn Email

    Related Posts

    New Data Shows the Extent to Which American Seniors Are Missing Out by Lapsing or Surrendering their Life Insurance Policy

    14 May 2025

    Buy-Ins To Buy-Outs Appear Stalled As Deal Complexity, Administration Resources Pose Obstacles

    14 May 2025

    Is Servicing an Overlooked Source of Life Settlement Alpha?

    14 May 2025

    Q&A: Shelly Beard, Managing Director, WTW

    14 May 2025

    Comments are closed.

    Most Popular

    New Data Shows the Extent to Which American Seniors Are Missing Out by Lapsing or Surrendering their Life Insurance Policy

    14 May 2025

    Buy-Ins To Buy-Outs Appear Stalled As Deal Complexity, Administration Resources Pose Obstacles

    14 May 2025

    Is Servicing an Overlooked Source of Life Settlement Alpha?

    14 May 2025

    UK Life Insurers to Benefit from Robust Bulk Annuity Market in 2025

    14 May 2025
    Ad

    Your trusted source for capital markets participation in Life Risk

    X (Twitter) Instagram LinkedIn
    Life Risk
    • About Life Risk News
    • Get In Touch
    • Our Team
    • Copyright Notice
    • Terms and Conditions
    • Privacy Policy
    • Sitemap
    Coverage
    • Home
    • Features
    • Events
    • Commentary
    Subscribe

    Type above and press Enter to search. Press Esc to cancel.

    We use cookies on our website to give you the most relevant experience by remembering your preferences and repeat visits. By clicking “Accept All”, you consent to the use of ALL the cookies. However, you may visit "Cookie Settings" to provide a controlled consent.
    Cookie SettingsAccept All
    Manage consent

    Privacy Overview

    This website uses cookies to improve your experience while you navigate through the website. Out of these, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may affect your browsing experience.
    Necessary
    Always Enabled
    Necessary cookies are absolutely essential for the website to function properly. These cookies ensure basic functionalities and security features of the website, anonymously.
    CookieDurationDescription
    cookielawinfo-checkbox-analytics11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Analytics".
    cookielawinfo-checkbox-functional11 monthsThe cookie is set by GDPR cookie consent to record the user consent for the cookies in the category "Functional".
    cookielawinfo-checkbox-necessary11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookies is used to store the user consent for the cookies in the category "Necessary".
    cookielawinfo-checkbox-others11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Other.
    cookielawinfo-checkbox-performance11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Performance".
    viewed_cookie_policy11 monthsThe cookie is set by the GDPR Cookie Consent plugin and is used to store whether or not user has consented to the use of cookies. It does not store any personal data.
    Functional
    Functional cookies help to perform certain functionalities like sharing the content of the website on social media platforms, collect feedbacks, and other third-party features.
    Performance
    Performance cookies are used to understand and analyze the key performance indexes of the website which helps in delivering a better user experience for the visitors.
    Analytics
    Analytical cookies are used to understand how visitors interact with the website. These cookies help provide information on metrics the number of visitors, bounce rate, traffic source, etc.
    Advertisement
    Advertisement cookies are used to provide visitors with relevant ads and marketing campaigns. These cookies track visitors across websites and collect information to provide customized ads.
    Others
    Other uncategorized cookies are those that are being analyzed and have not been classified into a category as yet.
    SAVE & ACCEPT