Meeting the demand for ways to manage longevity will continue to be both the challenge and the opportunity for reinsurers throughout 2008, say industry executives.
Reinsurers are starting to get a handle on the risk associated with longevity products, and boomers are starting to realize that they may need such products going forward, but interviews suggest the shift is just starting to transition from its fledgling stages.
Over 500 living benefits products are currently available from the life insurance industry, noted Chris Raham, a senior actuarial advisor with Ernst & Young LLP, during a recent conference sponsored by National Underwriter.
During the discussion on retirement income, Raham said that for a long time life insurers have outsourced mortality risk to reinsurers who were good at predicting mortality up to retirement age but less comfortable with it at ages over 65.
Conversely, he said in describing this transition period that retirement planning is facing, many consumers are just starting to consider ways to ensure regular income in retirement. To make his point, Raham asked the audience of senior executives how many had purchased a variable annuity with a living benefit. No hands were raised. However, when attendees were asked whether they had investment products as part of their retirement planning, at least half the room raised their hands.
Reinsurers contacted described how their efforts to meet longevity needs were developing.
Reinsurers are now better able to understand longevity risk than they have in the past, says Donna Kinnaird, president of Swiss Re Life & Health America, Armonk, N.Y. While there has been a lot of mortality data, there has not been a lot of longevity data, she explains. In order for prudent decisions to be made, both data as well as actuarial opinion are needed, adds Kinnaird.
There are 2 ways to meet the longevity challenge, through counterparty risk and by hedging, says Kinnaird, and each has its own challenges. There are a number of steps that need to be established to facilitate counterparty arrangements, she explains. They include establishing a reference price for longevity risk, developing a longevity index, and then creating counterparty agreements. But, synthetic hedging can also be a viable alternative, she adds.
As the industry is getting better at assessing such risks and turning to the capital markets, there will be a greater use of both reinsurance and securitizations, she says.
However, Kinnaird says she is not sure if ultimately one longevity product can be developed for all longevity needs. The reason, she explains, is that senor citizens need to understand what they are buying and in order to maintain transparency, products cannot be too difficult to understand.
Three or four years ago there was not much capacity for reinsuring variable annuities with guarantees, says Russell Hackmann, a managing director and head of variable annuity risk management with Swiss Re, New York.
Insurers offering these products can either hedge the risk themselves or reinsure the product, he adds.
Most of the requests for reinsuring these guarantees, Hackmann says, have been in the United States and in Japan. However, he adds, smaller developed countries such as Korea, Singapore and Taiwan are also beginning to consider reinsuring these features. The vast majority of requests are for VAs with guaranteed minimum withdrawal benefits, he explains.
Hackmann says there are a lot of different lenses through which the insurance industry looks to price reinsurance products, including the value of a guarantee and historical return of assets. Most companies, he continues, are focusing on the market price for risk using a model such as Black-Scholes.
There are 2 ways to cover risk–trading derivatives and reinsurance, Hackmann says. It would be difficult to securitize the risk in imbedded guarantees into a cat-like bond because there needs to be some predictability, something that is reasonably understandable and quantifiable, he adds. VA guarantees have more unpredictable cash flows, he notes.
Chris Stroup, chairman and CEO of Wilton Re, Wilton, Conn., says that while insurers have already begun to address the issue of living too long with products such as payout annuities, they need to reflect consumer demand for liquidity into their products. Reinsurers can help direct writers, he adds.
The capital markets have been relatively cautious about mortality risks but rather have been offering options such as more precise asset management being provided by some mutual fund companies, he continues. Capital markets look for risks that can be defeased, which is the reason there is not much participation in mortality risk, he explains. Hedge funds have considered such mortality risks because they are not correlated with other investment holdings, Stroup notes. Going forward, he says reinsurers will once again participate in disability, accident and health and long-term care reinsurance.
A paper, ‘Life Reinsurance Pricing: Longevity Risk, The Longevity Bond,’ prepared by PartnerRe, Pembroke, Bermuda, offers 3 solutions for longevity risk: traditional life reinsurance; a mortality swap in which the direct writer pays the yearly anticipated amount from an annuity and the reinsurer pays the actual amount due; and longevity bonds, which are linked to a selected-mortality risk index.
On Dec. 18, Moody’s Investors Service, New York, said one thing that may help reinsurers provide reinsurance for longevity is a reduction in the number of triggers embedded in financial and insurance contracts, which fell 9% in 2007. The findings were part of a Moody’s survey. (See NU, Dec. 24/31.)