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Tuesday 31 August 2010
Author: Russell Group

The solution to the looming challenges of longevity funding can only be achieved by the development of a public-private system, according to Swiss Re.

In its report titled “A short guide to longer lives: Longevity funding issues and potential solutions”, Swiss Re examines what (re)insurers and other groups can do to combat the growing challenge of life expectancy in society.

Greater convergence between buyers and sellers of longevity risk has led to increased opportunity for transactions in the reinsurance market, driving demand for greater capacity, the company has said.

According to Swiss Re in the short-term, demand for reinsurance solutions is expected to increase and clients are turning to reinsurers’ capacity as a first port of call in the knowledge that a capital market solution will take some time to develop. Despite the current measures being taken by the market to meet these challenges, only time will tell whether capital markets will increase capacity, added the reinsurer.

The report highlights the need for a collaborative approach, acknowledging that government, reinsurers and employees have a key role to play. It advises that governments should also support the development of a longevity capital market through the publication of “reliable, consistent mortality data to allow the production of transparent and robust indices”.

It added annuity providers will need additional longevity capacity in the longer term and the capital markets may be able to provide some of this. It advises that the insurance market must encourage the development of more sophisticated risk models that recognise potential future longevity trends, especially in light of Solvency II and similar regulatory initiatives. “Employers and pension plan trustees should assess whether they are reserving for longevity at an appropriate level and examine the feasibility of transferring some, or all, of the risk,” said Swiss Re.

Christian Mumenthaler, Head of Life & Health Products and member of Swiss Re’s Group Management Board, said: "While life expectancy is on the increase, the time required for implementing effective longevity funding solutions is running out. Insurers, governments and pension providers must act now to ensure that living longer remains a benefit to society, rather than a financial burden."