Insurance news from Swiss Re shows need for longevity risk coverage

Insurance News on Insurance Market Calculations
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The reinsurer points out a new market solution requirement in the industry.

According to Swiss Re’s latest insurance news announcement, the capacity of insurers is not great enough to cover approximately $23 trillion of the pension liabilities around the world against the risk that policyholders will be living longer than originally anticipated.

They recommend that the risk of longevity should be passed through to the investors.Insurance News on Insurance Market Calculations

This insurance news was made in the second largest global reinsurer’s recent report. In this document, they pointed out that for every additional year of life beyond the covered individual’s expectancy, the pension costs increase by 4 to 5 percent. This greatly adds to the pension fund burdens and to the weight on the shoulders of insurers.

The news continued in the report with the suggestions regarding ways to proceed.

The report showed that pension funds seeking to limit their degree of exposure from aging populations have commonly used a process known as longevity swaps. In these circumstances, a reinsurer or other counterparty covers the liability for a set period of time. Should the payments for pensions fall short of what had been estimated by the trustees, then the difference is taken by the counterparty. However, if the pension payments overshoot, then the counterparty must make a payout.

However, Swiss Re showed that the reinsurance industry’s capacity is now wearing thin, and there is now a great need for a solution based on capital markets. The company said that before any more longevity risk can be taken on, this solution must be found.

The report also indicated that longevity risk could be bundled for sale to investors in a way that is comparable to the system that insurers lay off their natural disaster risks within the catastrophe bond market. Government bonds ant tax revenue coupons were other types of suggestions that were noted for the solution.

In the report, Swiss Re said that “A reliable and widely accepted benchmark index will be needed.” In recent insurance news, investors have stated that there is an increased demand for catastrophe bonds, in part as a result of the perception of a lack of a link between them and other financial markets.

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