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The SCOR Innovation Podcast channel sheds light on evolving consumer needs in Life & Health and Property & Casualty (re)insurance and connects them to global ecosystems.
Welcome to the SCORE Innovation Podcast. As one of the world's largest reinsurers, SCORE provides insurance companies with diverse and innovative solutions focused on the art and science of risk. The SCORE Innovation podcast channel sheds light on evolving consumer needs in life and health and property and casualty reinsurance and connects them to global ecosystems. You can subscribe to the channel on your favorite podcast platform to get notified of all our new exciting content.
Speaker 2:Good morning. I am Ruth Damien, assistant vice president in the longevity team in the US. I work out of the Charlotte office in North Carolina in the US. I have been with SCORE for almost 2 years. Most of my professional career has been in financial insurance, so learning about longevity reinsurance is very exciting.
Speaker 2:I have the privilege this week of working with our team in London and attending the Bulk Anoities Conference in Westminster and City. I am here with Phil Curtis from our UK longevity team, and this is a perfect opportunity to have a conversation with him and learn about longevity. Good morning, Phil. How are you today?
Speaker 3:Morning, Ruth. I'm good. Thanks for inviting me. I should probably do a bit of an introduction. So I'm head of business development in SCORE's global longevity team, and a key part of my role is to talk to clients and insurers across the world about longevity risk and help them explore solutions where they want to pass on this unwanted risk to SCORE.
Speaker 3:Before joining SCORE 3 years ago, I was a specialist consultant and actuary advising stakeholders of UK pension schemes on transferring corporate pension risks to the insurance sector.
Speaker 2:Very interesting. Thank you. So, Phil, we are here to talk about longevity risk and the coverage score can provide. So to start us off, what is longevity risk?
Speaker 3:Yep. That's a that's a good place to start. Well, to give an exam style definition, a longevity risk is any potential risk attached to the increasing life expectancy of pensioners and policyholders, and it's that potential risk that they can eventually result in higher payouts than expected. So that's strict definition. But for example, an insurer may have promised to pay a policyholder an income for life, and the insurer might have received a single premium for this, so a single lump sum.
Speaker 3:And when coming up with that premium, they would have had to make an assumption on how long that policy holder will live. And if the policy holder lives longer than that assumption, then the insurer will have to pay more than they had expected when they set out that premium, all else being equal. And that's longevity risk. We see it in all kinds of insurance products that give a promise of income for life, such as a pension or lifetime annuity products.
Speaker 2:Okay. So is it a big risk? My background is in financial solutions, and focus tends to be on asset risk. But it's clear that interest in longevity risk is growing quickly.
Speaker 3:Yeah. It's fair to say that assets get most of the attention. It's how insurers and asset risk takers make their money, so that's clearly their focus. But over time, longevity could easily erode any profits for the insurer and ultimately become the dominant risk. Sort of the shape of longevity risk is that it grows over time, and it's compounded by duration.
Speaker 3:So unlike a lot of asset risk, there's no mean reversion. And so you see this sort of low volatility in the initial years, but it could, in the worst cases, sort of grow and grow, and it's a huge risk that you won't realize until it's too late. And so year on year, you may not see the effect. But looking over a longer period, it's likely that some annuity providers will see losses due to longevity. Back in my consulting days, we used to call longevity as an unrewarded risk.
Speaker 3:So you can't sort of add more expertise to make money off of longevity risk in the same way that you can with a portfolio of assets. So it's ultimately just a drag on your performance for an insurer.
Speaker 2:Very interesting. So if it's an unrewarded risk for insurers and pension schemes, what can they do about it?
Speaker 3:So the main protection is structured as what we call a longevity swap, and that's the standard longevity product that we offer at Skor.
Speaker 2:I understand that the term longevity swap could get confused with a financial derivative. Could you explain what a longevity swap is?
Speaker 3:You're right. It's not a financial derivative. It's perhaps a confusing name. A longevity swap is an exchange of payments on longevity experience, so a biometric risk, and not the performance of a market or an asset. It's structured as pure reinsurance, and so therefore, it's not a financial derivative.
Speaker 2:Okay. Alright. Let's get into the details. Could you walk us through how the longevity swap actually work?
Speaker 3:Sure. Yeah. It's a bit complicated, so I'll try and go through this slowly. In simple terms, the insurer or pension scheme who has the obligation to make lifelong payments to an individual can pass that obligation to SCOR, the reinsurer. So SCOR will pay a stream of cash flows to the insurer or pension scheme, and this stream of payments or cash flows is called the floating leg.
Speaker 3:And so in return, the insurer will pay score the same stream of cash flows, but based on the assumed longevity of the individual. And this is the fixed leg. So you've got 2 sets of cash flows going in directions from the insurer to score or from score to the insurer. And both sets of cash flows, this fixed leg and this floating leg, can both reflect the actual payments to be made to the members. And the only difference being the actual versus expected longevity outcome.
Speaker 3:So, essentially, the insurance company is fixing the longevity assumptions to be in line with what they expect to happen, thereby removing the risk. If the individual lives longer than that fixed assumption, then the insurer doesn't pay any more than what they had originally assumed, but they will continue to receive the income stream from score necessary to meet the obligation to that individual for as long as they need to for as long as that individual is alive. SCORE will charge a reinsurance fee for taking on this risk, and this is payable throughout the life of the contract. Essentially, it's added to the fixed leg of cash flow streams.
Speaker 2:Fascinating. So just to make this clear, so there's no exchange of assets?
Speaker 3:Absolutely. Yeah. That's right. The insurer retains full control of the assets. There's just a settlement each month, and that's calculated as the difference between the 2 cash flow streams for that month.
Speaker 2:So why does score 1 this risk when insurers don't?
Speaker 3:Yeah. That's a good one. So, primarily, it's a clear diversifier with the mortality risks we hold. So we have a protection business globally, and we hold a lot of mortality risks. And longevity is good to offset for that biometric risk that we already hold.
Speaker 3:As a result, we'd expect SCORE to be able to price this risk, this longevity risk, more competitively than an insurer or an annuity provider, especially if the annuity provider had to hold reserves for that longevity risk. We also have a specialist team dedicated pricing longevity products with well over a decade of experience pricing these long duration longevity swaps. So we're comfortable taking the risk for a reasonable reinsurance fee.
Speaker 2:Thank you. Could you share more details about SCORE's experience and its position in the longevity market?
Speaker 3:Absolutely. So we, score entered the longevity market in 2010, and we've written a number of innovative longevity deals with some of our largest deals covering pensions with over £5,000,000,000 worth of underlying liability. And whilst the majority of the longevity market is focused in the UK, our experience extends to North America, Western, Central Europe, and we continually look, entering new markets as our appetite for longevity grows globally and so does the demand.
Speaker 2:As you know, the pension risk transfer market in the US has been growing at a very fast pace. In 2023, there were about 46,000,000,000 sales with 850 PRT contracts completed. However, I hear from my US clients that there is interest in longevity risk transfer, but today, there seems to be relatively few transactions in the US.
Speaker 3:SCOR, we're constantly talking to clients in the US about longevity. It's clearly a growing market, and there is increasing appetite for passing longevity risk to the global reinsurance market as the awareness of longevity solutions continue to develop. And whilst in the US, there isn't the same regulatory incentive to pass on longevity as there is in the UK, that doesn't make it any less of a risk or drag on future profits. In the US, the numbers for annuities and longevity are absolutely mind boggling. You've got sort of 30,000,000,000,000 US dollars of pension assets, which exist in US pensions.
Speaker 3:A lot of this will go into longevity product. We can see that by the growth in, as you say, the US PRT market, the risk transfer market. And we also see insurers are continually developing annuity product, which provide this lifetime income, which all have longevity risk attached to them. And these numbers are vast, and finite number of insurers in the US can't retain or can't possibly retain all of that risk on their balance sheet. We wouldn't have thought.
Speaker 3:And at some point, and we expect this point to be very soon, it makes sense for US longevity to to be passed to the global reinsurance markets in large scales to share that risk across the global markets.
Speaker 2:This has been a very helpful session. Thank you, Phil, so much for your time and for sharing your knowledge. I'm looking forward to seeing what the future of longevity holds.
Speaker 1:Thank you for listening to us today. You can subscribe to the SCORE Innovation podcast on Apple Podcasts, Spotify, or your favorite platform, and be our 1st listener to new releases. Stay tuned and see you at the next episode.