A Quick Overview of the European Longevity Risk Transfer Market

Longevity Risk Transfer began in the UK (which is still currently in Europe until further notice). Since then, the UK and the Netherlands have dominated the landscape, but new players have been emerging in recent years, opening new risk management opportunities
September 26, 2019
euro, old couple, longevity risk transfer market, pension
Longevity risk market in the EU

The Longevity Risk Transfer Market has been around since 2006, when life insurers and pension funds in the UK started showing interest in transferring longevity risk off their balance sheets. The Netherlands joined the club in 2012, and since then the two have dominated the European LRT arena with markets worth well over £2.7 Trillion and £1.2 Trillion, respectively.

In both of these countries, the life and pension markets are very developed, and conditions were ripe for the evolving LRT market back in the 2000s. In both the UK and the Netherlands, pension and life assets are worth trillions, and comprise a large portion of the national GDP, which is usually a sign for an active private sector. Indeed, funded pensions programs are commonly managed by the private sector in Defined Benefit (DB) pension schemes. The more active the private sector is in the insurance and pension arenas, the more active the LRT market, as governments don’t commonly use the same risk transfer methods.

DB/DC pension schemes in European countries
DB and DC pension schemes in Europe (taken from: Longevity Risk Transfer activities by European insurers and pension funds, DNB)

Sign up for news and updates

A few notable transactions in the UK include the first-ever publicly announced LRT transactions between Swiss Re and UK Friend’s Provident in 2007, Dutch Aegon covering €20 billion in 3 transactions between 2012-2105 and Dutch Delta Lloyd covering €24 billion in two transactions between 2014-2015.

Other Countries Want In

Since the 2000s, other European countries have joined the LRT market in smaller shares, namely Ireland, France, and Switzerland. Ireland’s activity is of special note, as the Irish government announced in 2011 that it would issue bonds that allow the creation of sovereign annuities, to be used in LRT transactions. France entered the market in 2014, in a deal between AXA France and Hannover Re. Switzerland has been active mostly in the reinsurance domain.

European pension market share
European pension market share (taken from: Longevity Risk Transfer activities by European insurers and pension funds, DNB)

Until recently, many other countries in Europe had little to no LRT activity due to pensions being mostly state-funded, or risk being transferred to the policy holders themselves. This is changing rapidly as countries recognize the need to escalate their pension reform efforts to ensure sufficient retirement income for the general population. These efforts include promoting private pensions and annuities or funded pension programs managed by the private sector.

In addition, under the European Solvency II framework, insurance companies are required to retain SCR (solvency capital requirements) on their balance sheet by stressing the best estimate and increasing reserves and liabilities associated with longevity risk. This will lead to an increased need for solvency relief and longevity risk management solutions in all countries of the European Union.

More Capital, More Solutions and More Players

The market has also seen a number of new insurers and reinsurers join in recent years from all parts of the globe. An influx of players in the market, in addition to more capital, more creative and technological LRT solutions and increased globalization are allowing the market to expand quickly. Switzerland, Germany, France and the Scandinavian countries are on the map for potential market development, as they have a high ratio of DB pension schemes and high Insurance/pension assets/GDP ratio. The next few years are bound to be very interesting in the longevity risk market, so stay tuned for updates!

Vesttoo has developed advanced technologies for data-driven risk management, transferring actuarial risk to financial risk through the capital markets. Vesttoo specializes in risk modeling and alternative risk transfer for the Life and P&C insurance markets, providing insurers with a low-cost strategic risk management solution for immediate capital relief, value enhancement and liability hedging.

More posts