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The Actuary The magazine of the Institute & Faculty of Actuaries
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Q&A: Andrew Reid, Deutsche Bank

For the uninitiated, what is the purpose of a longevity hedging transaction?
It transfers longevity risk, whereby a party suffers loss if a group of lives live longer than expected, from the client to the hedge provider. Most commonly it would be for a pension scheme or annuity book, seeking to protect itself from the longevity risk inherent in its liabilities. The hedge would convert an uncertain longevity exposure into a certain exposure.

What forms can a longevity hedge transaction take?
Many forms. It could be written as a derivative or an insurance contract. Insurance policies such as annuities have longevity hedges embedded in them. The hedge could be bespoke, hedging the experience of the client’s portfolio, or population-based, having a client pay-off based on the experience of a population different from the client’s portfolio, typically that of a national population.

Who are typical takers of longevity risk and why?
To date, reinsurers have been the main final risk-takers. They have the necessary expertise. Longevity risk is often an offsetting risk or ‘macro hedge’ for their life insurance books. The race is on to get the capital markets involved. If you’re an investor without longevity-related liabilities, longevity could be an attractive investment. The attractions include: low correlation with other assets you hold, someone is paying a premium to remove their risk, its volatility profile is different from most other investments, and with rates currently close to zero there may be a (relative) dearth of other opportunities.

What amounts of capital are required to transact?
Typically, longevity hedges are unfunded, where the risk premium is paid over the life of the contract, so upfront collateral may not be required. Usually the trades are collateralised, so the client would need to have sufficient capital accessible to post as collateral as might be required. Generally, expected maximum collateral posting is perhaps of the order of 5% of notional (and collateral may well be required from the provider, rather than the client).

Is market appetite on the increase or decline?
What are the key indicators? Market appetite is definitely on the increase. The interest, particularly from UK pension schemes, is huge. The key indicator will be trades closed, but as the lead time is often six months to a year, many still have to come through. The next best indicator is providers’ pipelines, which are bulging at the moment.

How significant is counterparty risk?
It’s difficult to quantify. The contracts are long term, so counterparty risk could be significant. Most providers would mitigate this through collateralising the hedge.

How do you envisage the longevity market will develop in terms of the size and nature of transactions in the next ten years?
The general view seems to be something like £10-15bn each year for the next few years. Critical for this is the capacity of risk-takers. The reinsurers seem to have this capacity for the next few years. If the capital markets can successfully be brought in to take risk, capacity could be many times this amount.

What are typical timelines for transactions?
Typically six to 12 months from inception to closing a hedge.

What roles have actuaries played in the transactions with which you have been involved?
Actuaries have had huge involvement. With some clients, the client employs one or more actuaries. The client would appoint one or more actuarial consultants and an investment consultant to advise. The provider typically has several actuaries on its longevity desk — we have six, for example. And then the final risk-taker will either employ actuaries, as reinsurers do, or perhaps engage actuarial consultants if it is not a specialist longevity investor. So actuaries have a very tight grip on this market.

How do you measure your success?
By meeting client needs while ensuring the bank receives an acceptable return on capital deployed.

What has been your greatest professional challenge to date?
Switching from consultancy to markets (investment banking).

What are your pastimes?
Sport (sadly more watching now than playing) and trying to keep up with a very lively three-year-old daughter.

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Andrew Reid is a managing director and head of pensions origination in the capital markets and treasury solutions group at Deutsche Bank, and formerly of Credit Suisse and head of corporate consulting at Towers Watson.

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The opinions expressed in this article are those of the interviewee and are not representative of Deutsche Bank