Prudential Takes on Longevity Risk - Analyst Blog

Prudential Financial Inc. ( PRU ) has been chosen by Deutsche Bank ( DB ) as a reinsurance partner for its pension-related longevity risk. The agreement will transfer longevity risk of Deutsche Bank Rolls-Royce Pension Fund of more than $780 million via reinsurance contracts which will be issued by Prudential Retirement Insurance and Annuity Company, Hartford, CT.

Longevity risk is faced b y pension or annuity providers. This represents 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 burden by approximately 5%.

This trend has made insurance risk transfer very important as longevity de-risking would release the capital locked up in such businesses, restoring capital flexibility for businesses, especially in the current tight economic scenario.

Providers are thus 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 and larger-than-expected funding contributions have also increased the risk appetite of the pension plan sponsors. There has been a worldwide increase in pension de-risking demand with U.K. emerging as the leading market. The country has approximately $1 trillion in defined-benefit pension scheme liability.

Moreover, Solvency II is also pressurizing European insurers to maintain greater capital levels. Prudential foresees a growing opportunity in this area. This is validated by the recent agreement made by the company to provide reinsurance of longevity risk of approximately $723 million to U.K. based Rothesay Life and Paternoster, both wholly-owned subsidiaries of Goldman Sachs Group, Inc. ( GS ).

On the other end of the spectrum, Prudential, which runs a significant mortality risk due to its niche presence in the life insurance market, is planning to counter the losses or gains from this risk with gains and losses from longevity risk.

If longevity systemically improves, there would be fewer mortality claims. This would eventually improve profitability and help offset losses in the longevity business. Conversely, if the mortality portfolio shows an increase in the number of deaths, there should be an offsetting profit from longevity risk.

DEUTSCHE BK AG ( DB ): Free Stock Analysis Report

GOLDMAN SACHS ( GS ): Free Stock Analysis Report

PRUDENTIAL FINL ( PRU ): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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