As companies that offer pension plans continue to explore buyout deals to reduce their liabilities, reinsurers increasingly are attracted to underwriting the longevity risk taken on by insurers in such deals to hedge the mortality risk on their books.

In the United Kingdom particularly, as well as other parts of Europe, many employer-sponsors of workplace pension plans have been exploring ways to transfer their pension liabilities, experts say.

When London-based BT Group P.L.C. undertook the largest such deal to date in 2014, transferring £16 billion ($23.2 billion) of liabilities to a captive insurer and then reinsuring that risk with Prudential Insurance Co. of America, the trustee of the pension plan said the deal significantly reduced risk to the plan sponsor.

The chairman of the trustees, Paul Spencer, also said the deal provided “enhanced security” for plan members.

In the deals, plan sponsors buy insurance annuities to cover their pension liabilities and thus transfer them to an outside or captive insurer. That insurer then frequently passes on a portion of the risk to reinsurers.

Willis Towers Watson Group P.L.C. said in a March report that it expects about £20 billion ($29 billion) of pension liabilities to be transferred by longevity hedging deals this year.

Further, the report said that of the £2 trillion ($2.9 trillion) total U.K. defined benefit liabilities only around £150 billion ($217.5 billion) has been hedged.

Aon Hewitt noted in a report issued in December that de-risking efforts will be fueled by abundant capacity and growing demand, among other things, as insurers and reinsurers become more comfortable with the Solvency II risk-based capital rules that took effect in January.

“The financial appetite of the global reinsurance market remains strong and is expected to be even stronger in 2016,” according to the Aon Hewitt Risk Settlement Quarterly Market Update.

The report noted that insurers' ability to transfer at least some longevity risk they assume in buyout deals is likely a key factor in the pricing of those deals, based on the amount of risk transferred and retained.

“The record level of competition and extra insurer capacity will be beneficial for pensioner buy-in pricing next year,” Charlie Finch, a partner in Lane Clark & Peacock L.L.P.'s de-risking practice and a co-author of its report on the issue released in December, said in a statement at the time.

“We forecast buy-in and buyout capacity will grow to over £15 billion ($21.75 billion) in 2016,” he added.

Pension Insurance Corp. and Prudential P.L.C., two of the most active insurers of pension plan buyouts in the United Kingdom, said they had increased their use of reinsurance protection for longevity risk in 2015 when announcing their annual results, both in March.

PIC said it had reinsured £3.8 billion ($5.51 billion) — or 73% — of its longevity exposure in 2015, up from 66% of exposure a year earlier.

And Prudential said it had bought more reinsurance for longevity risk in 2015, partly because of the capital relief granted under Solvency II for reinsurance protection.

In the insurer's annual report, Penny James, group chief risk officer at Prudential, described longevity risk as “a significant contributor to our insurance risk exposure and is also capital-intensive under the Solvency II regime.”

“One tool used to manage this risk is reinsurance,” she said.

Insurers that carry out pension buyout deals often are attracted by the diversification that the longevity risks assumed in these transactions give them in a portfolio heavy with mortality risks, said Ari Jacobs, senior partner for global retirement solutions at Aon Hewitt in Norwalk, Connecticut.

Typically, he said, insurers then will look to reinsure that longevity risk.

In some cases, he noted, transfer of some of the risk to a reinsurer is part of the deal from the beginning. In other cases, he said, insurers may farm out some of the longevity risk after the deal is done.

The insurance market for pension buyouts in the U.K. is dominated by monoline companies more interested in buying assets than carrying peripheral risk, such as longevity risk, said Nigel Sedgwick, managing director at Willis Re, a unit of Willis Towers Watson in London.

“So they have relationships with reinsurers,” and, in the case of larger deals, reinsurance protection often will be negotiated at the same time as the original buyout, he said.

Reinsurers are attracted to the diversification provided by longevity risk, he said, and it is likely that reinsurers' interest in these types of deals will increase.

Ulrich Wallin, CEO of Hannover Re S.E., said last year that the reinsurer was keen on the diversification that writing longevity reinsurance offered. But in a call to analysts, he said that increasing competition meant that the Hanover, Germany-based reinsurer was being “conservative” in its approach to longevity risks and would “look for the right deals and not for the volume.”

While larger reinsurers are active in this area, smaller ones may also be prompted to start underwriting longevity risk to obtain the diversification benefits under Solvency II, Mr. Sedgwick noted.

In a commentary, Dafina Dunmore, director of insurance at Fitch Ratings Inc. in Chicago, said that Solvency II “incentivizes E.U. insurers to reinsure longevity risk as capital charges for counterparty risk with highly rated reinsurers are low compared with charges for longevity risk.”