Longevity risk transfer markets: market structure, growth drivers and impediments, and potential risks

December 2013

Ageing populations pose serious social policy and regulatory/supervisory challenges in many countries. Longevity risk - the risk of paying out on pensions and annuities for longer than anticipated - is significant when measured from a financial perspective. Longevity risk transfer markets: market structure, growth drivers and impediments, and potential risks is a forward-looking report released by the Joint Forum on longevity risk transfer (LRT) markets. It makes the following recommendations to policymakers and supervisors:

  1. Communicate and cooperate: Supervisors should communicate and cooperate on LRT internationally and cross-sectorally in order to reduce the potential for regulatory arbitrage.
  2. Understand longevity risk exposures: Supervisors should seek to ensure that holders of longevity risk under their supervision have the appropriate knowledge, skills, expertise and information to manage it.
  3. Assess relevant policies: To inform their policy towards LRT markets, policymakers should review their explicit and implicit policies with regard to where longevity risk should reside. They should also be aware that social policies may have consequences for both longevity risk management practices and the functioning of LRT markets.
  4. Review longevity risk rules and regulations: Policymakers should review rules and regulations pertaining to the measurement, management and disclosure of longevity risk with the objective of establishing or maintaining appropriately high qualitative and quantitative standards, including provisions and capital requirements for expected and unexpected increases in life expectancy.
  5. Ensure adequate risk-bearing capacity: Policymakers should consider ensuring that institutions taking on longevity risk, including pension fund sponsors, are able to withstand unexpected, as well as expected, increases in life expectancy.
  6. Monitor market developments: Policymakers should closely monitor the LRT taking place between corporates, banks, (re)insurers and the financial markets, including the amount and nature of the longevity risk transferred, and the interconnectedness this gives rise to.
  7. Pay attention to tail risk: Supervisors should take into account that longevity swaps may expose the banking sector to longevity tail risk, possibly leading to risk transfer chain breakdowns.
  8. Collect adequate data: Policymakers should support and foster the compilation and dissemination of more granular and up-to-date longevity and mortality data that are relevant for the valuations of pension and life insurance liabilities.

An earlier version of this report was issued for consultation in August 2013. The Joint Forum wishes to thank those who provided feedback and comments as these were instrumental in revising and finalising the report and its recommendations. The changes made to the consultation document are explained in a feedback statement annexed to the final report.

 

The Joint Forum was established in 1996 under the aegis of the Basel Committee on Banking Supervision (BCBS), the International Association of Insurance Supervisors (IAIS) and the International Organization of Securities Commissions (IOSCO) to deal with issues common to the banking, securities and insurance sectors, including the regulation of financial conglomerates.