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By Donia O'Loughlin | Published Sep 24, 2012

Liquid capital market is needed to boost funding: Swiss Re

A liquid capital market in longevity risk can ensure long-term funding of people’s longer lives, a new Swiss Re report has claimed.

The report, A mature market: Building a capital market for longevity risk, published today (24 September), highlighted that one of the biggest challenges facing society is ensuring that people can retire with sufficient financial security to enjoy the years to come.

As people live longer, reinsurers and insurers are playing a lead role for both pension funds and individuals in helping them to shoulder the risk through products such as longevity insurance – sometimes referred to as a longevity swap – and annuities.

However, according to Swiss Re, recent estimates suggest that the average pension fund scheme is underfunded by 24 per cent and defined benefit assets which are exposed to longevity risk total over $20,000bn (£12,319bn) globally. This means that there is an increasing need for ways to extend insurance industry capacity and ensure a sustainable funding system for longer lives, Swiss Re said.

Swiss Re claim that a mature market draws on the lessons learned from established capital markets, such as the UK inflation market and insurance-linked securities markets, as well as a previous successful longevity capital market transaction.

The study also contains interviews with potential investors who have differing opinions over the extent to which a longevity market is a realistic vision. Their concerns include general pricing considerations, the role of regulators and rating agencies, and the level of education in the market.

Alison Martin, head of life and health reinsurance at Swiss Re, said: “A capital market for longevity risk will be vital for the insurance industry in the long term.

“As the scale of the risk is so vast, capacity is unlikely to meet the future demand for longevity products without a capital market.

“A liquid market would form part of an overall solution. We will work together with other stakeholders in society to create a system that is sustainable throughout people’s longer lives.”

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