Prudential Retirement, a unit of Prudential Financial Inc. (NYSE:PRU - News) has extended its partnership with U.K.-based Rothesay Life, a wholly-owned subsidiary of The Goldman Sachs Group Inc. (NYSE:GS - News), as a reinsurance partner for its pension-related longevity risk. The agreement is the first reinsurance transaction for Prudential in 2012.

The transaction is intended to cover pension liability values worth approximately $665 million. The reinsurance contracts secure the retirement benefits of Uniq Plc Pension Scheme members, those who have been insured by Rothsay Life. These contracts will be issued by Prudential Retirement Insurance and Annuity Company, Hartford, CT.

Prudential started providing coverage on longevity risk last year and had provided coverage of approximately $723 million to Rothesay Life and Paternoster. This was the largest longevity transaction announced so far by the company. The company was also chosen by Deutsche Bank (NYSE:DB - News) as a reinsurance partner to transfer $780 million of longevity risk of Deutsche Bank Rolls-Royce Pension Fund.

Longevity risk is faced by pension or annuity providers. It is an indication that customers may live longer than expected. In such a scenario, providers would be exposed to higher-than-expected payout ratios.

Longevity worries continue to bother pension funds and insurers as medical advancements and healthier lifestyles have led to an increase in the average lifespan. A report by a major reinsurer, Swiss Re, stated that underestimating life expectancy by just one year can increase pension liability burden by approximately 5%.

This trend has made insurance risk transfer very important as longevity de-risking would release the capital locked up in such businesses, thus restoring capital flexibility for businesses, especially in the current tight economic scenario.

Consequently, providers are keen on finding new ways of managing their liabilities or transferring risk. Of late, a growing demand for longevity risk transfer has led to the emergence of other innovative reinsurance agreements like Longevity Swap transactions and Cross-Border risk transfer.

Other factors such as a declining interest rate, greater accounting and regulatory changes and larger-than-expected funding contributions have also increased the risk appetite of pension plan sponsors. There has been a worldwide increase in pension de-risking demand with U.K. emerging as the leading market. The country has approximately $1 trillion in defined-benefit pension scheme liability.

Moreover, Solvency II is also pressurizing European insurers to maintain greater capital levels. Prudential foresees a growing opportunity in this area.

On the other end of the spectrum, Prudential, which runs a significant mortality risk due to its niche presence in the life insurance market, is planning to counter the losses or gains from this risk with gains and losses from longevity risk.

If longevity systemically improves, there would be fewer mortality claims. This would eventually improve profitability and help offset losses in the longevity business. Conversely, if the mortality portfolio shows an increase in the number of deaths, there should be an offsetting profit from longevity risk.

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PRU Expands Longevity Risk Biz