The longevity swap market has been a little quiet in 2018 for a number of reasons that we've documented over the months, but broker Willis Towers Watson (WTW) expects that 2019 will be far more active, with a doubling of longevity swap volumes predicted.
As we've written before, there is no sign that longevity risk transfer and reinsurance activity will slow down, however, the form that risk transfer takes can fluctuate, depending on the needs of pensions and the appetite of the reinsurance market.
Looking ahead to 2019, WTW expects a buoyant marketplace, as those who have already de-risked much of their exposures find themselves still left with longevity risk, making targeted structures such as the longevity swap more attractive.
Pension buyouts and buy-ins have been very active over the last year, but these aren't always removing the total longevity risk exposure of a pension.
While WTW expects the bulk annuity market will remain at or near record levels of activity in 2019, there may be some upwards pricing pressure, the broker says, as capacity constraints begin to play into market dynamics.
However, the broker expects that the longevity swaps market will double, to more than £10 billion of volume in 2019, while at the same time mega-deals of over £1 billion are also expected to increase in pension risk transfer more generally.
That all suggests the need for increasing amounts of longevity reinsurance capacity as well, potentially pressuring capacity.
Ian Aley, Head of Willis Towers Watson's Transactions team, commented on the pension risk transfer market, "2018 was a record-breaking year in the bulk annuity market, including four "mega" transactions of over £1 billion, and we expect to see this buoyant level of activity to continue into 2019. Though capacity issues are starting to impact on insurers, and strong demand could lead to some upward pressure on pricing, buy-ins and buyouts remain at historically attractive pricing levels."
"Against this buoyant backdrop, pension schemes will need to be particularly mindful of how best to get traction in such a busy market. For smaller schemes this is likely to revolve around streamlining processes, with good preparation, governance and pre-agreed legal terms, while larger schemes should consider partnering with insurers to find optimal assets to match their liabilities."
The broker forecasts a "significant upturn" in the longevity swaps market in 2019, from the roughly £5 billion seen in 2018 to over £10 billion in 2019.
The increase will be a reflection of the significant investments put into de-risking by pension funds, which has left them with longevity risk as their most dominant exposure now.
For these pensions who have already de-risked the majority of their exposures, entering into longevity swaps will help them to secure their future funding even more.
With longevity the dominant risk, it will be interesting to see whether any index based longevity hedges come to market, as this could again become more attractive for these targeted risk transfer arrangements.
There remains an expectation that the capital markets will eventually have a larger role to play in hedging longevity risks, providing a welcome diversifying source of risk for ILS funds and those investing in life insurance-linked securities (ILS).