Skip to content
←Back to glossaryReinsurance

Longevity swap

A contract by which a pension scheme exchanges its uncertain pension payments for fixed ones, transferring longevity risk.

Definition

In 2014 the BT pension scheme signed a longevity swap of around 16 billion pounds, one of the largest ever done. In a longevity swap, a pension fund or insurer pays a reinsurer fixed amounts, based on assumed life expectancy, and receives in exchange the pensions actually due. If beneficiaries live longer than expected, the reinsurer pays the extra cost, and the scheme is hedged against longevity risk. Alongside conventional reinsurance, buy-outs and buy-ins, this contract dominates longevity transfer, which remains almost entirely a reinsurance market rather than one of tradable securities. The risk therefore ends up with the large reinsurers, which can offset it against their mortality books, for want of a capital market able to carry a horizon of several decades.

Its 7 cross-references, woven across the glossary's 18 categories
Longevity swap: Reinsurance glossary illustration, AlgoPolis
Example

The BT Pension Scheme entered into a longevity swap in July 2014 covering roughly sixteen billion pounds of liabilities, the largest such transaction at that date, with immediate retrocession of a large share of the risk to the reinsurance market.

Read next
ReinsuranceLongevity riskThe risk that pension or annuity beneficiaries live longer than expected, one of the largest exposures in the world and the only one that resists securitization.Read the entry →ReinsuranceFacultative and treaty reinsuranceThe two main forms of reinsurance. Facultative is placed risk by risk; a treaty covers a whole portfolio automatically.Read the entry →ReinsuranceBulk annuity (buy-in and buy-out)A contract under which an insurer takes on a pension scheme's annuities, either insuring them while the scheme keeps the liability (buy-in) or taking them over outright (buy-out).Read the entry →
Related terms
Also known as

longevity swap, longevity hedge, longevity swap pension

Stay informed

Follow the research

One letter a week. First, the week's underwriting note, when one is published: a dated, argued decision, signed by Paul Bernardski. Then what the observatory published on cyber risk, political risk and insurance. No account, no tracking.

No spam, one-click unsubscribe, no data ever sold.