Longevity Risk Transfer – Market and Regulatory Developments

Document Properties

• Type of Publication : Memorandum
• Date: August 29, 2013
• From: Mark Zelmer, Assistant Superintendent, Regulation Sector
• To:
  • All federally regulated life insurers and reinsurers in Canada,
  • Canadian Council of Insurance Regulators (CCIR)

In light of the fact that Canadians are living longer, the Canadian Institute of Actuaries recently released a draft report on Canadian Pensioner Mortality (July 2013).^{Footnote 1} It provides updated mortality tables showing that the life expectancies of Canadian pensioners continue to increase. Increasing longevity increases the cost of funding both pension plan obligations and insurer annuities involving life contingencies.

These increases are causing some pension plans to consider how they can best manage the larger financial obligations associated with longer periods of retirement. Life insurance and re-insurance companies have traditionally played an important role in assuming mortality risks, including longevity risk. It is therefore natural that there is a growing interest in transferring longevity risk from pension plans to insurance and reinsurance companies. If properly managed, longevity risk can be used to hedge the mortality risk in other life insurance obligations, and some jurisdictions (notably the UK) are already experiencing a trend in defined benefit pension plans transferring longevity risk.

The international regulatory community is working to increase the understanding of the risks associated with longevity risk transfers and to help set international principles for effective supervision of these arrangements. The Joint Forum^Footnote2 recently released a draft consultation paper entitled “Longevity Risk Transfer Markets: Market Structure, Growth Drivers and Impediments, and Potential Risks”. The Joint Forum is seeking comments from industry, policymakers and supervisors within and across the financial sectors by October 15, 2013.^{Footnote 3}

OSFI supports the development of international principles and standards that help promote a level playing field and limit the arbitrage of regulatory rules between jurisdictions. To this end, the industry and provincial insurance supervisors are encouraged to provide comments on the report directly to the Joint Forum. OSFI will consider what steps are necessary to meet the international expectations within the Canadian regulatory framework as international work progresses.

Similar to OSFI’s advisory^Footnote4 to defined benefit pension plans, OSFI expects that those insurers and reinsurers that may be interested in assuming longevity risk should have the appropriate risk management expertise and governance to assume this particular risk.

We look forward to receiving your comments on this Joint Forum paper specifically and the topic of longevity risk transfer more generally. Please direct your comments to Stuart Wason at stuart.wason@osfi-bsif.gc.ca.

• Mark Zelmer
• Assistant Superintendent
• Regulation Sector