Longevity risk Steven Rimmer OPA meeting, 16 October 2014

Longevity Update| 16 October 2014

2

Life expectancy continues to increase

Life expectancy has increased by about three months every calendar year

Source: OECD Health Data 2012

14

15

16

17

18

19

1995 2000 2005

Life expectancy (males, age 65)

Canada

Netherlands

Switzerland

United Kingdom

United States

Longevity Update| 16 October 2014

Longer retirements and shorter working lives

Retirement

Employment

Childhood/Education

3

Longevity Update| 16 October 2014

Fewer working age individuals relative to retired

United Nations, World Population Prospects – 2012 Revision

"Support ratio" Number of people of working age (20 to 64)

relative to number of retirement age (65 and over)

4

Longevity Update| 16 October 2014

Recent UK experience – males, 65 and over

Source: Chris Shaw, "Fifty years of United Kingdom National Population Projections: How Accurate Have They Been?" Population Trends, 128, ONS, 2007 5

Longevity Update| 16 October 2014

Uncertainty about the future

68

70

72

74

76

78

80

82

Lif

e e

xpe

cta

ncy

at

bir

th (

yea

rs,

ma

le)

Observed 1971 1973 1975 1977

1979 1981 1983 1985 1987

1989 1991 1992 1994 1996

1998 2000 2002 2004

Projection originated in

Source: Chris Shaw, "Fifty years of United Kingdom National Population Projections: How Accurate Have They Been?" Population Trends, 128, ONS, 2007

It is not possible to predict future life expectancy with any certainty

6

Longevity Update| 16 October 2014

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Possible approaches to managing longevity risk

Change liabilities

Direct hedge Accept

Longevity risk

Pass on cost Indirect hedge

• Longevity insurance

• National indices • Bulk annuity

Longevity insurance National index Bulk annuity

• Complete longevity risk transfer

• Investments remain in pension scheme

• Partial longevity hedge • High basis risk (eg

difference national and scheme populations)

• "Pre-payment", ie assets are transferred to provider

Longevity Update| 16 October 2014

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Result: future pension cash flows are uncertain

2013

An

nu

al p

en

sio

n p

aym

en

ts Scenario 1: longer lifespans

Scenario 2: shorter lifespans

Pension scheme actuary's estimate

Scenario 1: Illustrative increased annual pension payments if longevity gets longer

Scenario 2: Illustrative lower annual pension payments if longevity gets shorter

Uncertainty around longevity makes it difficult for trustees and sponsoring employers to budget and invest

Longevity Update| 16 October 2014

Provider

Key features of longevity insurance

Pension scheme

Premiums

Claims (= Pension payments)

Pension payments

Pensioners

• No initial cash outlay. Assets stay in the pension scheme

• Premiums set at outset. Linked to actual pension increases. Netted against claim payments

• Pension scheme maintains relationship with the pensioners. Benefits are not altered

• Complete longevity risk transfer for actual scheme population. Also covers other demographic risks

9

Longevity Update| 16 October 2014

10

Longevity insurance

2013

An

nu

al p

en

sio

n p

aym

en

ts

Certainty The pension plan pays the same fixed premium payments

regardless of changes in longevity

Swap Format The provider covers the cost if longevity increases

and gains if longevity decreases

Scenario 1: Net difference paid by the provider to the pension scheme

Scenario 2: Net difference paid by the pension scheme to the provider

Annual premiums

Scenario 1: Illustrative increased annual pension payments if longevity gets longer

Scenario 2: Illustrative lower annual pension payments if longevity gets shorter

Longevity Update| 16 October 2014

Reinsurers have a strong rationale to hold longevity risk on balance sheet

11

Diversification

Longevity risk is a small part of the overall insurance portfolio

Longevity uncorrelated to other exposures

Opposite peril

Consolidator

Already covering hundreds of thousands of individuals in pension plans and annuity books for longevity

Significant exposure to mortality risk

Swiss Re's diverse range of business

Figures relate to premiums earned in 2013 Source: Swiss Re 2013 annual results

Administration of closed life insurance books

5%

Life and health reinsurance

35%

Direct corporate insurance

10%

Property (eg housing, commercial) and casualty

(eg third party motor,

employer liability)

reinsurance 50%

A global diversified reinsurer has the diversification, mortality exposure and consolidation role allowing it to hold longevity risk on its balance sheet

Longevity Update| 16 October 2014

Reinsurer

Reinsurer Group

12

Outline of approaches to accessing reinsurance capacity

Trustees Bank SPV

Bank Group Sponsor Group

Derivative Transformer

Trustees Insurance carrier Reinsurer Insurance policy Reinsurance agreement

Sponsor Group Reinsurer Group

Trustees Insurance carrier Reinsurer Insurance policy Reinsurance agreement

Sponsor Group Reinsurer Group Insurer or Bank Group

Reinsurance agreement

Longevity Update| 16 October 2014

Reinsurer

Reinsurer Group

13

Outline of approaches to accessing reinsurance capacity

Trustees Bank SPV

Bank Group Sponsor Group

Derivative Transformer

Trustees Insurance carrier Reinsurer Insurance policy Reinsurance agreement

Sponsor Group Reinsurer Group

Trustees Insurance carrier Reinsurer Insurance policy Reinsurance agreement

Sponsor Group Reinsurer Group Insurer or Bank Group

Reinsurance agreement

Longevity Update| 16 October 2014

UK corporate pension longevity transactions

Babcock International Credit Suisse GBP 1.2bn Reinsurance market

RSA Rothesay Life GBP 1.9bn Reinsurance market

Royal County of Berkshire GBP 1.0bn Swiss Re

20

09

BMW Deutsche Bank (Abbey) GBP 3.0bn Reinsurance market

British Airways Rothesay Life GBP 1.3bn Reinsurance market 20

10

ITV Credit Suisse GBP 1.7bn Reinsurance market

British Airways Rothesay Life GBP 1.3bn Reinsurance market

Pilkington GBP 1.0bn Legal & General Reinsurance market

Rolls-Royce Deutsche Bank GBP 3.0bn Reinsurance market

20

11

2

01

2

AkzoNobel GBP 1.4bn Swiss Re

LV= GBP 0.8bn Swiss Re

BAE Systems GBP 3.2bn Legal & General Reinsurance market

20

13

Bentley Motors

Carillion

AstraZeneca

BAE Systems

Deutsche Bank (Abbey)

Deutsche Bank

Deutsche Bank

Legal & General

Reinsurance market

Reinsurance market

Reinsurance market

Reinsurance market

GBP 0.4bn

GBP 1.0bn

GBP 2.5bn

GBP 1.8bn

Aviva GBP 5bn Swiss Re / reinsurance market

20

14

BT GBP 16bn Reinsurance market

Phoenix Life GBP 0.9bn Reinsurance market

14

Thank you

15

Confidential

International Vision | 8 October 2014

Legal notice

©2014 Swiss Re. All rights reserved. You are not permitted to create any modifications or derivative works of this presentation or to use it for commercial or other public purposes without the prior written permission of Swiss Re.

The information and opinions contained in the presentation are provided as at the date of the presentation and are subject to change without notice. Although the information used was taken from reliable sources, Swiss Re does not accept any responsibility for the accuracy or comprehensiveness of the details given. All liability for the accuracy and completeness thereof or for any damage or loss resulting from the use of the information contained in this presentation is expressly excluded. Under no circumstances shall Swiss Re or its Group companies be liable for any financial or consequential loss relating to this presentation.

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Longevity Update| 16 October 2014 17

Longevity Update| 16 October 2014

Recent UK experience – females, 65 and over

Source: Chris Shaw, "Fifty years of United Kingdom National Population Projections: How Accurate Have They Been?" Population Trends, 128, ONS, 2007 18