(Reuters) — British insurer Aviva P.L.C. has agreed to transfer the risk of members of its staff pension plan living longer than expected to three reinsurers for £5 billion ($8.37 billion), the largest-ever such deal.
Aviva told Reuters on Thursday that the deal was agreed with Swiss Re Ltd., Munich Reinsurance Co. and Scor S.E.
"The trustee is delighted to have taken another important step in our ongoing process to improve further the level of security of all our members' benefits," said Ian Prosser, chair of trustees for the Aviva Staff Pensions Scheme, in a statement.
Longevity swaps, which involve a final salary pension plan hiving off the risk that pensioners outlive expected lifespans, form a growing market due to rapidly increasing life expectancies.
But the Aviva swap is the first of its kind in that it is transferring its 19,000 members' longevity risk directly to reinsurers rather than going through a single insurance company which would traditionally act as an intermediary.
Reinsurers help shoulder the risks faced by insurance companies by taking on some of their exposure in exchange for part of the profit.
Aviva's transaction by itself represents more than half of the total £8.9 billion ($14.90 billion) of longevity swaps in 2013, and is substantially larger than the previous £3.2 billion ($5.36 billion) record set by a BAE Systems P.L.C. deal last year.
"We know that life expectancy is growing — this type of insurance provides peace of mind that there is protection in place no matter how long people live," said Thierry Leger, global head of life and health products at Swiss Re.
Statisticians have consistently underestimated life expectancy, leading many pension plans to seek to farm out the risk of being forced to pay out for longer than they have provisioned for.
Longevity swaps provide a way for reinsurers to offset the risk of early death they take on through the writing of life insurance.
The transaction was brokered by Linklaters and Hymans Robertson, who said the deal would open the door for other arrangements to follow suit.