With questions over health and mortality surging to the top of public consciousness amid the pandemic, there has been heightened interest in life assurance and, by extension, reinsurance coverage. How do carriers manage these portfolios over time?
As macabre as the topic can be, the spread of SARS-CoV-2 and the associated health issues and deaths have focused the world’s attention on how to deal with the question of long-term care and mortality.
For life reinsurers covering large portfolios of risk, however, there are other longer-term trends ranging from statistics on obesity and smoking, to diet and exercise preferences that have a more pronounced impact on portfolios over time.
For this sector, managing and maintaining portfolio value over time is the largest challenge as demographic changes and underlying trends impact how and when policies come to fruition.
But how does the market manage these longevity risks in portfolios which cover thousands and thousands of individual policies?
“The ability to reinsure deferred lives is increasingly opening up reinsurance options.” Tom O’Sullivan, Canada Life Re
Four ways to hedge
Tom O’Sullivan, president of Bermuda-based life reinsurer Canada Life Re, spoke to Bermuda:Re&ILS to break down exactly how the sector deals with these portfolios over the long term.
Hedging a portfolio of life risks over the duration of a policy is no straightforward task, O’Sullivan says. There are four main products that the industry uses:
- Longevity swaps: A trade where the reinsurer receives a premium from the life carrier equivalent to the expected payment plus the reinsurer’s margin (“fixed line”) while the reinsurer will pay the life carrier the actual payments (“floating line”).
“This would be considered by the industry to be a ‘vanilla longevity swap’,” O’Sullivan said.
- Longevity swap with experience refund: Similar to a longevity swap, but the margin added to the expected payments is higher, and an experience refund is paid to the life insurer if experience is much better than expected. This will be cheaper for the life carrier, especially if it believes mortality will not improve as much as the reinsurer expects.
- Tail risk cover: Structured as a stop loss where a retention limit on aggregate payments over a number of years is established and the reinsurer would pay a claim if exceeded.
The premium paid to the insurer is usually in lump-sum instalments payable over a number of years and the life carrier could have the option to recapture at certain premium points if experience is significantly better and capital relief is decreased significantly.
This method is usually less expensive for the life carrier as the capital required by the reinsurer is often lower, as the life carrier still assumes some of the longevity risk.
- Funded reinsurance: O’Sullivan says that Canada Life Re is increasingly seeing insurers who want to cede both the asset and the longevity risk as part of the reinsurance. This can be done via a funded reinsurance transaction where the insurer passes all risks to the reinsurer.
For all of the above methods, O’Sullivan highlights that it is vital the split between annuitants in payments and deferred annuitants must be reflected.
“Not all reinsurers view the deferred annuitants in the same fashion and many will not solely insure the deferreds,” he says.
“Traditionally very few reinsurers have offered capacity for deferred lives with most reinsurers not accepting deferred lives at all, but is this changing gradually where more reinsurers are willing to take on this risk.
“The ability to reinsure deferred lives is increasingly opening up reinsurance options for full buy-ins or buy-outs for pension plans.”
Another driver of demand in the market is pension funds which are seeking to de-risk their portfolios from longevity particularly in light of strong recent asset performance which, he says, can be achieved using a combination of the methods above alongside creating a dedicated captive company for the reinsurer to assume the risk.
“Lifestyle impacts on mortality are an increasingly hot topic.”
The coronavirus conundrum
While understanding that macro themes surrounding health and mortality rates, as well as demographic changes, form a key part of the life reinsurance business, the question that has impacted all sectors of not just life but the broader risk industry over the last year is of course the COVID-19 pandemic.
The pandemic has prompted a widespread rethink across the industry on how to handle risks from such diseases going forward. While the excess death toll globally and impact on health is an obvious concern, O’Sullivan says that the long-term impact on longevity risk remains murkier.
“Currently the impact of COVID-19 on future longevity is uncertain. Some believe the pandemic will drive increased longevity improvements due to the advent of mRNA vaccines, increased awareness of the importance of basic hygiene, such as cough etiquette, hand washing, etc, and in the short term a selection impact from deaths having been concentrated in the lives of people in poorer health,” he says.
“Others feel COVID-19 may become endemic and that countries potentially cutting health spending to recoup some of the costs of COVID-19 support are potential reasons for the future deterioration of longevity.
“Outside of the pure longevity risk we are seeing schemes who may have already hedged the longevity risk looking to enter into bulk annuities and to novate the reinsurance to the bulk annuity insurer, aka a buy-out transaction.”
Outside of the pandemic, O’Sullivan says, the market is focused on lifestyle impacts which can have a more pronounced impact on health and mortality rates over a longer horizon.
“It is important to manage the run-off over time from an operational standpoint and to ensure we appropriately reserve for the risk. In order to do this we continuously develop our bases to ensure they capture both current longevity and expected future changes in longevity,” he explains.
“An important aspect of this is understanding how mortality for our insured annuitant business and pensioner population will move relative to the general population.
“Lifestyle impacts on mortality are an increasingly hot topic as well, in terms of positive lifestyle changes and an increasing awareness of the importance of diet and exercise in some parts of the population. Offsetting this however are increasing obesity rates in other segments of the population,” he concludes.
Canada Life Re, COVID-19. Risk, Life, Insurance, Reinsurance, Tom O'Sullivan, Bermuda