Longevity Indices: Is the time ripe? - Longevity Analytics | Club Vita · 2018. 9. 10. · 3...
Transcript of Longevity Indices: Is the time ripe? - Longevity Analytics | Club Vita · 2018. 9. 10. · 3...
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Financial Conduct Authority and Licensed by the Institute and Faculty of Actuaries for a range of investment business activit ies.
Longevity Indices: Is the time ripe?
4pm BST
6th September 2018
@ClubVita
#longevityindices
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Introducing today’s panel
Douglas Anderson
Founder, Club Vita
Steven Baxter
Head of R&D,Club Vita
Avery Michaelson
Longitude Solutions
Jeff Mulholland
PWC
Kai Hoffmann
Legal & General
Join the discussion…
LinkedIn: Friends of Club Vita group
Twitter: @ClubVita #longevityindices
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Introducing longevity swaps
Provider(pension scheme or
insurer)
BeneficiariesProvider
Actual benefit promises
Fee
Expected benefit payments
Actual benefit payments
Indemnity
IndexBenefit payments based
on experience of a reference population,
typically for limited term
Indemnity Index
Longevity risk removed Full Partial
Term ‘Last person standing’ Limited
Legals Bespoke Standardisable
Execution Complex Quick, Simple(?)
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What risks are you protected against?
Indemnity Index
Deferred pensioners
Large schemes/insurers
Tail risk
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Transactions to datePall (UK) Pension Fund
• England & Wales index-based swap
• 10 year duration
• Non-pensioners
20122011 2013 2014 2015 2016 2017 2018
Lucida
• England & Wales index-based swap
• First use by insurance company
Delta Lloyd
• Dutch pensions and annuity policyholders
• Two transactions
• Duration of 6 years (2014) and 8 years (2015)
• Each covering c. €12bn longevity reserves (c. €350m notional)
Pension schemes Insurance companies
Aegon
• Dutch annuitants
• Three transactions
• Covering a total of c. €20bn longevity reserves
Sources: Websites of Lucida, Professional pensions, Artemis & Hymans Robertson buy-ins, buyouts & longevity swaps updates. Pure longevity swaps only. Ignores Bonds e.g. Swiss Re Kortis Bond (2010) and the unsuccessful EIB/BNP Bond (2004). Also ignores swaps based on underlying experience of a specific book e.g. Aviva-RBS (2009).
201020092008 ?
NN
• Dutch pension fund and annuitant policyholders
• Single transaction
• Covering c. €3bn longevity reserves
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Does the market need longevity indices?
BeneficiariesPension Schemes
InsurersReinsurersCapital
Markets
Indemnity
Index
Fee + fixed legc.£2trn+ of UK private
sector pension liabilities exposed to longevity risk
Global mortality risk market can potentially support ‘diversification benefit’ for c. 100% of UK longevity
risk (currently)
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Why might the time be ripe?
Why has it not happened yet (in the UK)? What is likely to drive change?
Regulatory ‘enthusiasm’
Term: Finite term rather than ‘last person standing’
Value: Understanding of the level of retained risk
Pricing: Index-based swaps should be cheaper than indemnity1
2
3
4 First transactions
Proven appetite for 10+ year termsGrowing understanding of the impact of finite term
Clearer understanding of level of risk protection provided
Indemnity and index pricing dynamic set to shift
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Indemnity
Price
↑ Index↓
Hi I’m
new
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Value for money: Basis risk
• Population indices equally weight each person
• Pensions schemes…
‒ Smaller
‒ Different socio-economic mix to population
‒ Unequal mix of liability exposure
• Pension scheme experience will differ from the index
• How much less than 100% ‘hedge’?
Basis RiskPopulation Index Portfolio
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Value for money: Material risk reduction
65% 80%
‘Smaller’ schemes
Skewed populations
PortfolioSocio- economic Indices Portfolio
75%
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Term matters
T
Indemnity
Index
Pre-defined approach
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The longevity “ecosystem” Future?
BeneficiariesPension Schemes
InsurersReinsurersCapital
Markets
Indemnity
Index
Fee + fixed leg
Natural poolers of ‘insurance’ riskNatural
providers of capital?
Cost effective (broad) protection where insurance regimeas high cost of capital e.g. tail risks, deferreds, …
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Questions?...
Douglas Anderson
Founder, Club Vita
Steven Baxter
Head of R&D,Club Vita
Avery Michaelson
Longitude Solutions
Jeff Mulholland
PWC
Kai Hoffmann
Legal & General
Join the discussion…
LinkedIn: Friends of Club Vita group
Twitter: @ClubVita #longevityindices
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Thank you
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material and charts included herewith are provided as background information for illustration purposes only. This
Powerpoint presentation is not a definitive analysis of the subjects covered and should not be regarded as a
substitute for specific advice in relation to the matters addressed. It is not advice and should not be relied upon. This
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CV. CV accept no liability for errors or omissions or reliance upon any statement or opinion herein.
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Appendix:What is the mortality-longevity dividend?
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Writing longevity for “better than free” (1)
• If an insurer writes one risk only then ever additional unit of business costs the same in overall (total) capital (1)
• Adding a new, different risk introduces diversification and is capital efficient (less capital per unit of extra business) (2)
Tota
l Cap
ital
Req
uir
emen
t
Undiversified Capital Requirement
Business as usual Diversifying business
Introduce a new risk here
Tota
l Cap
ital
Req
uir
emen
t
Undiversified Capital Requirement
Business as usual
1
Introduce a new risk here
2
(considering risks in isolation) (considering risks in isolation)
Source: Original graphics produced by presenter for chapter on longevity risk in the Palgrave Handbook of Unconventional Risk Transfer
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Writing longevity for “better than free” (2)
Source: Original graphics produced by presenter for chapter on longevity risk in the Palgrave Handbook of Unconventional Risk TransferTo
tal C
apit
al R
equ
irem
ent
Undiversified Capital Requirement
Business as usual Negatively correlated business
Tota
l Cap
ital
Req
uir
emen
t
Undiversified Capital Requirement
Business as usual Negatively correlated business
• For a negatively correlated risk it is possible capital reduces – e.g. reinsurers with lots of mortality risk (life insurance) pricing for longevity (3)
• Will reach an optimal mix of business between risks (4)
‒ Reinsurer constrained to maintaining this mix
‒ New entrants (light on longevity, heavy on mortality) are able to offer better prices (all else being equal)
3 4
‘Free zone’
‘Optimal mix’
(considering risks in isolation) (considering risks in isolation)