Longevity swaps

[Edward chong]

Hi,
I would like to ask that:
1. Assuming an indemnity-based contract, is the notional amount on which floating & fixed payments are based regularly adjusted for actual number of deaths, e.g. each year? My concern is, if it is not, then when the fixed mortality rates turn out to be too low over a long time, reinsurers (swap providers) may "owe" insurers (risk hedgers) a big amount as the expected present value of future payments, meaning that insurers have a large counterparty credit exposure to reinsurers. Posting collaterals mitigates partly this risk but this ties up capital as lower-yielding safe assets which poses an opportunity cost to the parties who post them.
2. Assuming an index-based contract, how is the longevity basis risk being assessed in MCR & SCR? Are index-based longevity risk transfers even eligible for any benefit of SCR reduction?

Thank you.

 

[Mark Willder]

Hi,
I would like to ask that:
1. Assuming an indemnity-based contract, is the notional amount on which floating & fixed payments are based regularly adjusted for actual number of deaths, e.g. each year? My concern is, if it is not, then when the fixed mortality rates turn out to be too low over a long time, reinsurers (swap providers) may "owe" insurers (risk hedgers) a big amount as the expected present value of future payments, meaning that insurers have a large counterparty credit exposure to reinsurers. Posting collaterals mitigates partly this risk but this ties up capital as lower-yielding safe assets which poses an opportunity cost to the parties who post them.
2. Assuming an index-based contract, how is the longevity basis risk being assessed in MCR & SCR? Are index-based longevity risk transfers even eligible for any benefit of SCR reduction?

Thank you.

1. The fixed payments are known in advance. The floating payments would need to be calculated each year using the latest experience.

2. I imagine that the approach varies between companies depending on the exact nature of the swap and their underlying basis. The company would need to consider the extent of differences between the reference portfolio and their own business, eg by considering the split by age, gender, smoker status, socio-economic group etc, and would then need to consider the extent to which these different groups could experience differing trends in the future.

Best wishes

Mark