Longevity De-Risking: Lessons Learned & Suggestions for the Future · 2018-10-02 · Index Hedges...

28
Longevity De-Risking: Lessons Learned & Suggestions for the Future Avery Michaelson, Founding Partner, Longitude Solutions Longevity 14 | Amsterdam | September 2018

Transcript of Longevity De-Risking: Lessons Learned & Suggestions for the Future · 2018-10-02 · Index Hedges...

Page 1: Longevity De-Risking: Lessons Learned & Suggestions for the Future · 2018-10-02 · Index Hedges Captive Solutions. Where has the market been? Screw drivers and hammers invented

Longevity De-Risking: Lessons Learned & Suggestions for the Future

Avery Michaelson, Founding Partner, Longitude Solutions

Longevity 14 | Amsterdam | September 2018

Page 2: Longevity De-Risking: Lessons Learned & Suggestions for the Future · 2018-10-02 · Index Hedges Captive Solutions. Where has the market been? Screw drivers and hammers invented

What is Longitude Solutions?

Longitude Solutions is a transaction-oriented

advisor with expertise in longevity risk.

• Founded in 2016 to advance the market for longevity risk hedging

• Nominated for Life Transaction of the Year by Trading Risk Awards

• Exclusive advisor to NN on index-based longevity hedge in 2017

• 3 Senior Partners in New York and Amsterdam with broad expertise and capabilities

Page 3: Longevity De-Risking: Lessons Learned & Suggestions for the Future · 2018-10-02 · Index Hedges Captive Solutions. Where has the market been? Screw drivers and hammers invented

The Longitude Solutions Team

• Founded Longitude Solutions in 2016

• Exclusive Advisor to NN on longevity hedge in 2017

• Former Head of Longevity at Société Générale

• Expert at structuring and distributing longevity risk

• Former Co-head of Capital Management for Achmea, leading annuity reinsurance and longevity derisking investigations

• Non Executive Director at Friends First in Ireland 2009-2018

• Former Partner of Watson Wyatt and leader of Insurance M&A team

• Former Head of Pricing and Hedging solutions at Dutch Life company of NN Group

• Expert at structuring and pricing pension buy-outs and longevity swaps

• Experience hedging and reinsuring European and Japanese VA portfolios

Avery

Michaelson

Alan J

Rae

David

Schrager

Founding Partner Senior Partner Senior Partner

Page 4: Longevity De-Risking: Lessons Learned & Suggestions for the Future · 2018-10-02 · Index Hedges Captive Solutions. Where has the market been? Screw drivers and hammers invented
Page 5: Longevity De-Risking: Lessons Learned & Suggestions for the Future · 2018-10-02 · Index Hedges Captive Solutions. Where has the market been? Screw drivers and hammers invented

The Second Law of Thermodynamics states that the total

entropy of an isolated system can never decrease over time.

Entropy is increasing in the longevity market due to a variety of

structures designed spread this risk to new counterparties.

Page 6: Longevity De-Risking: Lessons Learned & Suggestions for the Future · 2018-10-02 · Index Hedges Captive Solutions. Where has the market been? Screw drivers and hammers invented
Page 7: Longevity De-Risking: Lessons Learned & Suggestions for the Future · 2018-10-02 · Index Hedges Captive Solutions. Where has the market been? Screw drivers and hammers invented
Page 8: Longevity De-Risking: Lessons Learned & Suggestions for the Future · 2018-10-02 · Index Hedges Captive Solutions. Where has the market been? Screw drivers and hammers invented

We will examine these topics:

1. Value Chain of De-risking

2. Type of Risk (Index / Indemnity)

3. Duration of Contract

4. Risk Level of Contract

5. Structures & Forms of Contracts

For each topic, we will consider:

i. Where has the market been?

ii. Where is (should) the market go?

iii. Considerations for Hedgers

iv. Considerations for Risk Takers

Overview of Presentation

Page 9: Longevity De-Risking: Lessons Learned & Suggestions for the Future · 2018-10-02 · Index Hedges Captive Solutions. Where has the market been? Screw drivers and hammers invented

Where has the market been?

Linear & Incomplete

Where is the market going?

Chutes & Ladders

Value Chain of De-risking

Considerations for Hedgers

Increase capacity, ensure competitive pricing

Considerations for Risk Takers

Increase capabilities to encourage more transactions

Page 10: Longevity De-Risking: Lessons Learned & Suggestions for the Future · 2018-10-02 · Index Hedges Captive Solutions. Where has the market been? Screw drivers and hammers invented

PENSIONS INSURERS REINSURERSCAPITAL

MARKETS

Pension Buyouts Longevity Swaps

OLD Value Chain:

• Pensions transacting with Insurers

• Insurers reinsuring to Reinsurers

• Minimal Capital Markets participation

Page 11: Longevity De-Risking: Lessons Learned & Suggestions for the Future · 2018-10-02 · Index Hedges Captive Solutions. Where has the market been? Screw drivers and hammers invented
Page 12: Longevity De-Risking: Lessons Learned & Suggestions for the Future · 2018-10-02 · Index Hedges Captive Solutions. Where has the market been? Screw drivers and hammers invented

NEW Value Chain:

• More connections at all parts of the value chain

• Greater Capital Markets participation

PENSIONS INSURERS REINSURERSCAPITAL

MARKETS

New Buyout Players

Index HedgesCaptive Solutions

Page 13: Longevity De-Risking: Lessons Learned & Suggestions for the Future · 2018-10-02 · Index Hedges Captive Solutions. Where has the market been? Screw drivers and hammers invented

Where has the market been?

Screw drivers andhammers invented

Where is the market going?

Selecting the right tool for the job

Type of Risk (Index vs. Indemnity)

Considerations for Hedgers

Optimizing risk and capital for business model

Considerations for Risk Takers

Available information, and capabilities required

Page 14: Longevity De-Risking: Lessons Learned & Suggestions for the Future · 2018-10-02 · Index Hedges Captive Solutions. Where has the market been? Screw drivers and hammers invented

Indemnity Longevity Swaps

Indemnity longevity swaps are a precise tool.

They require some skill/dexterity to use.

Page 15: Longevity De-Risking: Lessons Learned & Suggestions for the Future · 2018-10-02 · Index Hedges Captive Solutions. Where has the market been? Screw drivers and hammers invented

Index-Based Longevity Hedges

Index-based hedges also get the job done.

Almost anyone can swing a hammer.

Page 16: Longevity De-Risking: Lessons Learned & Suggestions for the Future · 2018-10-02 · Index Hedges Captive Solutions. Where has the market been? Screw drivers and hammers invented

Both tools are useful. They accomplish similar things.

You have to select the right tool for the job!

Index or Indemnity? Index and Indemnity?

Page 17: Longevity De-Risking: Lessons Learned & Suggestions for the Future · 2018-10-02 · Index Hedges Captive Solutions. Where has the market been? Screw drivers and hammers invented

Where has the market been?

Experimentation with maturities

Considerations for Hedgers

Getting real risk transfer, regulatory approval

Considerations for Risk Takers

What’s permitted by business model? Liquidity?

Duration of Hedging Contracts

Where is the market going?

Moving to longer duration contracts

Page 18: Longevity De-Risking: Lessons Learned & Suggestions for the Future · 2018-10-02 · Index Hedges Captive Solutions. Where has the market been? Screw drivers and hammers invented

100%

80%

60%

40%

20%

0%

1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065

Actual Mortality Rates

Projected Mortality Rates =re-parameterized commutation

taking account mortality experience during the risk period

Beginning of Risk Period

End of Risk Period

Historical Mortality Rates

20-year Index Hedge + Commutation

Page 19: Longevity De-Risking: Lessons Learned & Suggestions for the Future · 2018-10-02 · Index Hedges Captive Solutions. Where has the market been? Screw drivers and hammers invented

100%

80%

60%

40%

20%

0%

1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065

Actual Mortality

RatesProjected Mortality Rates =

re-parameterized commutation taking account mortality experience during the risk period

Beginning of Risk Period

End of Risk Period

Historical Mortality Rates

10-year Index Hedge + Commutation

More Risk in Commutation & Greater Basis Risk

Page 20: Longevity De-Risking: Lessons Learned & Suggestions for the Future · 2018-10-02 · Index Hedges Captive Solutions. Where has the market been? Screw drivers and hammers invented

100%

80%

60%

40%

20%

0%

1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065

Actual Mortality Rates

Projected Mortality Rates =re-parameterized commutation

taking account mortality experience during the risk period

Beginning of Risk Period

End of Risk Period

Historical Mortality Rates

Continued Innovation & Greater Precision

Longer Risk Period = More Risk Transfer

Page 21: Longevity De-Risking: Lessons Learned & Suggestions for the Future · 2018-10-02 · Index Hedges Captive Solutions. Where has the market been? Screw drivers and hammers invented

Where has the market been?

Full Longevity Swaps & Tail Risk Index Covers

Where is the market going?

Dissecting the risk (and maturity) spectrum

Risk Level of Contracts

Considerations for Hedgers

Cost of Capital, First Loss vs. Extreme Downside

Considerations for Risk Takers

Risk / Return? Capital invested? Collateralization?

Page 22: Longevity De-Risking: Lessons Learned & Suggestions for the Future · 2018-10-02 · Index Hedges Captive Solutions. Where has the market been? Screw drivers and hammers invented

Full Longevity Swap

50% 70% 90%

Full longevity swaps cover all downside, but transfer away all upside.

Longevity Upside Longevity Downside

Page 23: Longevity De-Risking: Lessons Learned & Suggestions for the Future · 2018-10-02 · Index Hedges Captive Solutions. Where has the market been? Screw drivers and hammers invented

Tail Risk Protection

50% 70% 90%

Longevity tail risk protection has been offered in index format.

Tail

Longevity

Risk

Page 24: Longevity De-Risking: Lessons Learned & Suggestions for the Future · 2018-10-02 · Index Hedges Captive Solutions. Where has the market been? Screw drivers and hammers invented

Dissecting the Longevity Risk Spectrum

50% 70% 90%

Market segmentation may exist in the longevity market.

Recent experience has shown longevity upside has value.

Tail Longevity

Risk

At-the-Money

Longevity Risk

Longevity

Upside

Page 25: Longevity De-Risking: Lessons Learned & Suggestions for the Future · 2018-10-02 · Index Hedges Captive Solutions. Where has the market been? Screw drivers and hammers invented

Where has the market been?

Reinsurance & Swaps (Derivatives)

Structures / Form of Contracts

Considerations for Hedgers

Function determines the form

Where is the market going?

Increasing use of Fully-Collateralized Notes

Considerations for Risk Takers

Business model drives decision making

Page 26: Longevity De-Risking: Lessons Learned & Suggestions for the Future · 2018-10-02 · Index Hedges Captive Solutions. Where has the market been? Screw drivers and hammers invented

Fully-collateralized Notes Reduce Credit Risk

A-rated Insurer

Unrated Investors

SPV / TrustAAA-rated, liquid collateral1

Hedge Payout

Note Payout

2

3

Page 27: Longevity De-Risking: Lessons Learned & Suggestions for the Future · 2018-10-02 · Index Hedges Captive Solutions. Where has the market been? Screw drivers and hammers invented

Lessons Learned & Suggestions

• Experimentation… with lessons learned

• Different solutions meet different objectives

• Risk takers are flexible, there’s a market for most ideas

• Longevity market entropy is increasing, and we should encourage this

• A larger, more diverse and liquid market benefits all business models

Page 28: Longevity De-Risking: Lessons Learned & Suggestions for the Future · 2018-10-02 · Index Hedges Captive Solutions. Where has the market been? Screw drivers and hammers invented

Avery MichaelsonFounding Partner

[email protected]

+1 917 204 4121

Alan J RaeSenior Partner

[email protected]

+31 620 021 692

David SchragerSenior Partner

[email protected]

+31 624 521 678