TITLE• Presentation Points
– Additional Points
– Additional PointsLongevity Panel –Trends and Developments in Longevity Risk Transfer
TITLE• Presentation Points
– Additional Points
– Additional PointsChair - Wayne DanielPanel - Roland Johnson
- Gordon Fletcher- Gavin Jones
Longevity Risk Transfer• Overview of Longevity Risk
– Longevity risk exists in insurers annuity portfolios and defined benefit pension schemes.
– Over the last decade or two, managers have dealt with many other risks, including
asset-liability matchinginterest and inflationequity and credit
using Liability Driven Investment strategies
Pension Funds – De-risking
0
50
100
150
200
250
50 / 30 / 20 / 10 20 / 40 / 30 / 10 0 / 60 / 40 / 0
Equities / Gilts / Credit / Property
EquityRates / InflationCreditPropertyLongevity
Typical pensionscheme
Moving outof equities
Taking only credit andlongevity risk
As pension schemes de-risk eg. by switching from equitiesto bonds, longevity risk looms larger as an issue
TITLE• Presentation Points
– Additional Points
– Additional PointsRoland JohnsonVP, Longevity BenefitsRGA Life Reinsurance Company of Canada
Longevity Risk Transfer
From
Canadian
Viewpoint
8
Why Longevity Now?Demographic and economic environmentsPopulation aging, with significant mortality improvements
Risk of living too long will become more important than risk of dying too soon
Baby boomers moving from active employment to retirement
Low interest rate combined with high volatility equity markets
Canadian Historical Life Expectancies
9
Significant increased over last century
Continuing to increase for both males and females
But slower pace for females since 1975
50
55
60
65
70
75
80
85
1930194019501960197019801990200020052007
FemaleMale
At Birth
Source: Statistics Canada
Canadian Historical Life Expectancies
10
Significant increased over last century
Continuing to increase for both males and females
But slower pace for females since 1975
At Age 65
10
12
14
16
18
20
22
1930 1940 1950 1960 1970 1980 1990 2000 2005
FemaleMale
Source: Statistics Canada
Canadian Mortality Improvement
11
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
0-44 45-64 65-74 75-84 85-89 90-94 95+ All
Male
Female
1991 to 2006 Average Annual Improvements Rates
Source: OSFI – Office of the Chief Actuary
12
Longevity Financial Impacts
Customer’s perspective
Pension Plan’s perspective
Insurer’s perspective
Government’s perspective
13
Longevity Risk Transfer Structures
Pension buy-out or buy-in
Individual payout annuities
Benefit (indemnity) swap
Coinsurance
Coinsurance with funds withheld
Liability swap (Reverse YRT)
Longevity Bonds
Canada
14
Market Size in CanadaRegistered Pension Plans assets: $1,003B in 2009 Life Insurance Industry: $82B
RRSP assets: $371B in 2009 Life Insurance Industry: $86B
Source: CLHIA Annuity Report December 2009
15
Market Size in Canada - Payout Annuities
Source: CLHIA Annuity Report December 2009
$750$1,079
$1,391$1,723 $1,706 $1,550
$1,829$1,586
$351
$773
$1,190
$1,274
$253 $387$184
$258
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
2000 2005 2008 2009 2000 2005 2008 2009
Group
Individual
Annuity RRIF/LIF
Life Insurance Industry - New Premiums
16
Market Size in Canada - Payout Annuities
Source: CLHIA Annuity Report December 2009
$15,805$19,572
$22,944 $24,473
$13,588 $14,350 $15,148 $16,377
$14,560$12,697
$15,536$16,847
$1,157 $1,988 $1,803 $2,083
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
$45,000
2000 2005 2008 2009 2000 2005 2008 2009
Group
Individual
Annuity RRIF/LIF
Life Insurance Industry - Assets
17
Pension Buy-out & Buy-in
Pension plan pays single premium to insurer
Pension liabilities/risks transferred to insurer
Buy-out:Pension payments directly from insurer to annuitants
Contract between insurer and each annuitant
Buy-in:Pension payments (bulk) from insurer to pension plan
Pension plan continues to pay annuitants
18
Individual Payout Annuities
Contract between insurance company and policyholder
Single premium
Annuity payment Fully guaranteed, or
Guaranteed payment portion combined with variable payment portion that can fluctuate with market, or
Minimum guaranteed payment with potential income growth
19
Longevity Benefit Swap
Premiums = Expected benefit payments (fixed leg) + Risk premium Fixed up front
Payable by Client (Pension plan or Insurance company)
Benefits = Actual benefit paymentsAs per contractual obligation toward policy owner
Payable by (Insurer or Reinsurer)
Net cash flows exchanged
True risk transfer
20
Longevity Benefit Swap
-
0.20
0.40
0.60
0.80
1.00
1.20
1 2 3 4 5 6 7 8 9 10 11
Projected Claims
Premiums
Net Cash Flows
21
Longevity - Risks
Misestimating base mortality
Misestimating future mortality improvements
Mortality volatility
Annuities could continue to be paid to the deceased
Counterparty
22
Canadian Mortality Studies CIA Individual Annuitant Mortality Experience
Coming out soon 1996-2006
Comparing with 1983 IAM Basic Table
CIA currently working to produce Canadian table
Canada Pension Plan Mortality Study
Pension Plan UP94 (US Table)
RP 2000 (US Table )
CIA currently working to produce Canadian table
Canadian Population – Statistics Canada
Longevity Reinsurance Deal - Canada
One large deal done in 201060% of group annuity block of business ($2.5B)
Benefit swap basis
23
TITLE• Presentation Points
– Additional Points
– Additional PointsGordon FletcherRisk adviserMercer
Pension plans and longevity
-1.0%
-0.5%
0.0%
0.5%
1.0%
Impa
ct o
n co
ntri
butio
n ra
te
1 in 100 1 in 4 1 in 4 1 in 100
Baseline risk
Add concentration
riskAdd trend
risk
• Pension plans now more sophisticated in measurement
• Pension plans now more sophisticated in management• Around 12 public longevity deals in the UK• Recent first deal on non-retired members with longevity index• Comparison with US
TITLE• Presentation Points
– Additional Points
– Additional PointsGavin JonesSenior Longevity ActuarySwiss Re
Historic Canadian Male improvements with CLIFR AA scale modification
source: www.mortality.org, , Swiss Re calculationCanadian Institute of Actuaries
Male life expectancy at age 65Risk is systematic in nature
www.mortality.org
“The margin for adverse deviations … should reflect the uncertainty of that assumption and of any related data." – CLIFRCanada Male age 80 – Mortality projection two models
Life expectancy age 65 in years: Lee-Carter model 19.0, Age-Period-Cohort model 21.5, UP94@2020 19.4
source: www.mortality.org, Swiss Re calculation
Where does longevity exposure end up?
RSA
Royal County of Berkshire
BMW
Bank
Written directly by Reinsurer
Bank
£1.9 bn
£1.0 bn
£3.0 bn
Reinsurer capacity is finite …… but there is plenty of it for now.
Total assets backing longevity liabilities worldwide: $20Tr
Reinsurers
Reinsurers
Babcock International Bank£1.2 bnReinsurers
31
Finite capacity, disproportionate demand
Although the bulk annuity market is growing, activity is still small in comparison to the total pensions market
– At the end of 2010 approx GBP 35 billion of pension liabilities had been transferred through bulk annuity buyouts
UK corporate pension liabilities
GBP1.4 trillion
Proportion of UK corporate pension liabilities insured
each year
Under 1%pa
UK Life Companies' annuity reserves
GBP 150bn
There is insufficient capacity in the insurance market to absorb the future demand for longevity risk transfer from UK pension plans alone
Ultimately longevity risk supply greater than capacity of insurance sector
32
Swiss Re has entered into a transaction with Kortis Capital Ltd. ("Kortis") to receive up to $50m of payments in the event of a large increase in the differential in mortality improvements between male lives aged 75-85 in England & Wales and male lives aged 55-65 in the US
First tradable rated security providing protection against longevity trend risk
Trigger is based on a longevity divergence index measuring mortality improvements in England & Wales relative to mortality improvements in the US
Management Highlights"Swiss Re's longevity strategy focuses on providing our clients with indemnity protection, while supporting the development of efficient capital market solutions on an indexed basis as a source of future long-term capacity”
– Brian Gray, Chief Underwriting Officer, Swiss Re
"The Kortis programme is of particular note as it provides protection against adverse deviation in mortality improvements for both Swiss Re’s mortality and longevity portfolios, whilst taking into account the complementary nature of the two risks”
– Christian Mumenthaler, Head Life & Health, Swiss Re
TITLE• Presentation Points
– Additional Points
– Additional PointsLongevity Panel –Trends and Developments in Longevity Risk Transfer