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Abstract
The longevity risk transfer market in Europe and North America remains in its infancy despite rapid growth in recent years, and further qualitative progress is needed to develop a commoditized market. Reinsurance sidecars, which are commonly used in the property and casualty market in the United States, have enormous potential to play an important role in such development. Transaction structures involving reinsurance sidecars can be adapted to benefit cedants and sponsoring reinsurers and also to attract a broader spectrum of investors and participants by reducing the long-tail risk inherent in longevity risk transfer. While several transaction structures are possible, each would fundamentally provide additional capital to support transactions in a form that is not subject to a requirement to hold a regulatory solvency capital buffer, thereby enabling sponsoring reinsurers to offer keener pricing to cedants. As a result, a European Union-based cedant could gain considerable capital benefits by reinsuring longevity risk, market risk or both to a reinsurance sidecar.
ACKNOWLEDGMENTS
The authors are grateful to Chip Gillis, Executive Chairman, Athene Life Re, and Amy Kessler, Head of Longevity Risk Transfer, Investment & Pension Solutions, Prudential Financial, for their contributions.
Discussions on this article can be submitted until October 1, 2020. The authors reserve the right to reply to any discussion. Please see the Instructions for Authors found online at http://www.tandfonline.com/uaaj for submission instructions.
Notes
1 Sandor (Citation2012).
2 Blake et al. (Citation2014, 258–60).
3 Pigott and Walker (Citation2016).
4 Pigott and Walker (Citation2016); Eccles (Citation2017).
5 Blake et al. (Citation2014, 259–60). In the absence of an effective hedge, insurers operating under the Solvency II regime “have to charge a 6% cost of capital above the risk free rate when calculating” the market value margin of such risks.
6 Blake et al. (Citation2014, 260, note 10) and Biffis and Blake (Citation2014, 16)
7 Coughlan (Citation2013, 65).
8 Coughlan (Citation2013, 65).
9 Blake et al. (Citation2006), Biffis and Blake (Citation2014, 15–16).
10 A forward contract based on mortality rates.
11 Coughlan (Citation2013, 65).
12 Taya Jeffries (Citation2016). There is a further £5 trillion in liabilities in the U.K. public pensions (as of 2010); see Levy (Citation2012, 7).
13 See Blake et al. (Citation2014, 258–60). Since 2015, when the government removed the requirement for individuals to purchase lifetime annuities when they retired, the sale of individual annuities has fallen significantly. In response, insurers switched into the bulk purchase annuity market, so their overall exposure to longevity risk has changed little.
14 Blake et al. (Citation2014, 260, note 10).
15 Blake et al. (Citation2014, 265).
16 Biffis and Blake (Citation2014, 14).
17 Ruffel (Citation2012) and Artemis (Citation2012).
18 Artemis (Citation2015).
19 Blake et al. (Citation2014, 258–60).
20 Reinsurance coverage beginning with the first dollar and covering all losses up to a specified limit.
21 ModCo is a type of reinsurance whereby the cedant retains the reinsurance premium and also retains the policy reserves on its financials. The reinsurer does not post any reserves on its financials. The withheld premium is allocated to a “ModCo” account and is invested for the reinsurer’s benefit. The balance of the ModCo account is adjusted quarterly to equal the statutory reserves as at the quarter end. Increases are charged to the reinsurer and decreases are for the reinsurer’s benefit.
22 An “orphan vehicle” is one where the common shares are owned by a purpose trust; that is, the vehicle is not owned by the sponsoring reinsurer and so is not consolidated in the reinsurer’s accounts.
23 The Eden Re vehicle, sponsored by Munich Re, is a good example of a vehicle that has listed its notes—in this case on the Bermuda stock exchange.
24 A reinsurance company that accepts a retrocession, which is when a reinsurance company cedes some or all of a reinsured risk to another reinsurance company.
25 Several vehicles that started off as sidecars have continued year after year often with investors rolling over from year to year. Argo’s Harambee Re, Hiscox’s Kiskadee, and Everest’s Mount Logan Re are some examples.
26 See, for example, the definition of “special purpose vehicle” in Article 13(26) of Directive 2004/138/EC of the European Parliament and of the Council—Solvency II; and definitions of “special purpose business” and “special purpose insurer” in Section 1 of the Bermuda Insurance Amendment Act 2008.
27 See Risk Transformation Regulations 2017 (SI 2017/1212).
28 See note 24.
29 Biffis and Blake (Citation2014).
30 This section discusses a structure in which both asset and longevity risks are hedged, but this structure could be used to securitize either asset risk or longevity risk. An asset-risk-only securitization would leave longevity risk to be either retained by the cedant or reinsured into the conventional reinsurance market.
31 The risk modules specified are nonlife underwriting risk, life underwriting risk, health underwriting risk, market risk, and counterparty default risk.
32 Under Solvency II, intangible assets such as goodwill are given a zero value, but if there is an intangible asset that can be sold separately and there is a market price for such an asset, then such an asset can be counted. However, the insurer must hold 80% of the value recognized of the intangible as part of its SCR.
33 Article 138 of the Delegated Act.
34 Article 208(1) of the Delegated Act.
35 Article 38(1)(c) of the Delegated Act.
36 Article 197(5) of the Delegated Act.
37 Article 197(7) of the Delegated Act.
38 Article 213 of the Delegated Act.