S&P expects continued expansion of PRT market

S&P Global Ratings anticipates that the transfer of pension risks to the life insurance industry will continue to grow over the next decade, noting that insurers’ robust capital buffers and prudent mortality assumptions are limiting downside rating risks.

S&P’s recent report, “Insuring Longevity Risk In An Aging World,” stated that for providers of defined benefit pensions, longevity risk presents a significant exposure that often goes unhedged. With global populations aging and the difficult-to-predict long-term life expectancy trends, pension providers have been increasingly turning to the insurance industry to help manage their longevity risk.

Over the past five years, demand for solutions such as pension risk transfer (PRT) has grown in several insurance markets, particularly in the U.K., U.S., Canada, and the Netherlands.

Rising demand for PRT offers rated life insurers in these markets an opportunity to strengthen their business risk positions through long-term returns and product diversification.

Although PRT offers insurers long-term earnings prospects, it also brings a range of risks and requires life insurers to manage long-term cash flow commitments.

Despite PRT being capital-intensive, S&P considers capital levels at most rated life insurers sufficient to allow for additional exposure to this line of business. Its analysis included a longevity stress test, which showed that insurers’ strong capital buffers and prudent mortality assumptions are limiting downside rating risks.

S&P added that further increases in demand could soften pricing, but it expects sophisticated underwriting and risk management to help insurers active in the longevity market preserve their overall creditworthiness.