Reinsurance Group Takes on Pension Risk - Analyst Blog
RGA International Reinsurance Company Limited, a subsidiary of Reinsurance Group of America, Inc. (NYSE: RGA) has been chosen by Royal London Mutual Insurance Society Ltd. as a reinsurance partner for its pension-related longevity risk. The agreement will transfer the £1.0 billion longevity risk of Royal London via reinsurance contracts, which will be issued by RGA International.
Reinsurance Group's significant capacity to write longevity to balance sheet and its financial strength, reinforced by its expertise, offer a compelling proposition for long-dated longevity protection solutions.
Longevity risk is faced by pension or annuity providers. It is an indication that customers may live longer than expected. In such a scenario, providers would be exposed to higher-than-expected payout ratios.
Longevity worries continue to bother pension funds and insurers as medical advancements and healthier lifestyles have led to an increase in the average lifespan. A report by a major reinsurer, Swiss Re, stated that underestimating life expectancy by just one year can increase pension liability by approximately 5%.
This trend has made insurance risk transfer crucial as longevity de-risking would release the capital locked up in such businesses, thus restoring capital flexibility in businesses, especially in the current tight economic scenario.
Consequently, providers are keen on finding new ways of managing their liabilities or transferring risk. Of late, a growing demand for longevity risk transfer has led to the emergence of other innovative reinsurance agreements like Longevity Swap transactions and Cross-Border risk transfer.
Other factors such as a declining interest rate, greater accounting and regulatory changes as well as larger-than-expected funding contributions have also increased the risk appetite of pension plan sponsors. There has been a worldwide increase in pension de-risking demand with U.K. emerging as the market leader. The country has approximately £1 trillion in defined-benefit pension scheme liability.
Moreover, Solvency II is also putting pressure on European insurers to maintain greater capital levels. Reinsurance Group foresees a growing opportunity in this area.
Insurer Prudential Financial Inc. (NYSE: PRU) is actively participating in risk transfer, with its focus on the growing pension risk transfer market. Prudential is currently managing pension obligations of General Motors Co. (NYSE: GM) and Verizon Communications Inc. (NYSE: VZ).
Reinsurance Group carries a Zacks Rank #4 (Sell).
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