Longevity risk transfer deal of the year: LV= and RGA
In December 2017, LV= completed a reinsurance deal with RGA on a block of approximately £900m legacy with-profits deferred annuity business.
The transaction justifies winning longevity risk transfer deal of the year because it was structured to overcome a number of issues that had previously been deemed barriers to a successful reinsurance solution.
This included the inability to benefit from the Solvency II matching adjustment due to issues such as the majority of the book being in deferment and premium paying; the optionality of policyholders in terms of the timing and form of their benefits; and with-profits features.
The objective of the reinsurance initiative was to improve, at an acceptable cost, the quality, quantity and stability of LV='s capital without introducing excessive counterparty and concentration risk.
The solution segregated risks into those best held by the reinsurer (long-tailed longevity and asset risks), and those best held by LV= (short-term persistency and with-profits risks). This allowed for a larger range of counterparties to participate, including those regulated under Solvency II, allowing for more competitive pricing.
LV= effectively exchanged the bonds previously held with a reinsurance asset whose cashflows respond to changes in future longevity expectations, and therefore more closely match the liability cashflows.
The structure enabled LV= to transact at a price that was lower than its best estimate view of the liabilities, as well as benefitting from an immediate increase in Solvency II capital of approximately £50m.
Another benefit was the significant reduction in balance sheet volatility and risk appetite buffer capital.
The judges commended the submission for successfully explaining the challenges of the transaction and the innovative aspects of it.