LONDON (Reuters) – Insurers do not have enough capacity to cover some $23 trillion in global pension liabilities against the risk that people will live longer than expected and should seek to pass such longevity risk through to investors, Swiss Re said on Monday.
In a report, the world's No.2 reinsurer said each additional year of life expectancy raises pension costs by about 4-5 percent, adding to the burden on pension funds and insurers.
Pension funds looking to minimise their exposure to an aging population have often used longevity swaps, through which a counterparty – often a reinsurer – takes on their liabilities for a defined period. If pension payments fall short of trustees' estimates, the counterparty pockets the difference, but must pay out if they overshoot.
But capacity within the reinsurance industry is running short and a capital markets-based solution needs to be found before reinsurers are unable to take on more longevity risk, Swiss Re said.
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