The Bank of International Settlements has launched a consultation on the longevity risk transfer (LRT) market.
The consultation, Longevity risk transfer markets: market structure, growth drivers and impediments and potential risks, said that longevity risk, the risk of paying out pensions and annuities for longer than anticipated, is significant when measured from a financial perspective.
It includes the following recommendations:
- Supervisors should communicate and cooperate on LRT internationally and across sectors in order to reduce the potential for regulatory arbitrage.
- Supervisors should seek to ensure that holders of longevity risk under their supervision have the appropriate knowledge, skills, expertise and information to manage it.
- Policymakers should review their explicit and implicit policies with regards to where longevity risk should reside to inform their policy towards LRT markets. They should also be aware that social policies might have consequences on both longevity risk management practices and the functioning of LRT markets.
- Policymakers should review rules and regulations pertaining to the measurement, management and disclosure of longevity risk with the objective of establishing or maintaining appropriately high qualitative and quantitative standards, including provisions and capital requirements for expected and unexpected increases in life expectancy.
- Policymakers should consider ensuring that institutions taking on longevity risk, including pension scheme sponsors, are able to withstand unexpected, as well as expected, increases in life expectancy.
- Policymakers should closely monitor the LRT taking place between employers, banks, insurers and the financial markets, including the amount and nature of the longevity risk transferred, and the interconnectedness this gives rise to.
- Supervisors should take into account that longevity swaps may expose the banking sector to longevity tail risk, possibly leading to risk transfer chain breakdowns.
- Policymakers should support and foster the compilation and dissemination of more granular and up-to-date longevity and mortality data that are relevant for the valuations of pension and life insurance liabilities.
The consultation will close on 18 October 2013.