S&P has published extracts of a roundtable discussion on longevity securitisations it recently hosted.

The rating agency observes: "With recent transactions in the UK, longevity securitisations are attracting more attention in the US. Differing market dynamics in the UK and US are also revealing the direction and focus their longevity securitisation markets will take: the UK market transactions generally focus on companies transferring their pension plan risk, known as 'de-risking'; transactions in the US lean more towards mortality catastrophe bonds."

It continues: "The [roundtable] panellists offered their perspectives on those markets, concluding that there's significant growth potential in both. Still, they cautioned that given the generally complex nature of these types of transactions - a considerable amount of data due to the thousands of individuals in every pool, for example--strategy to execution could take as long as a year. Moreover, investors remain concerned about counterparty risk and the illiquid nature of these transactions."

Another key issue is regulation. So, S&P asked: "What do you believe will be the impact of new and existing financial regulations on the longevity market?"

Jeffrey Stern, partner in the structured finance and derivatives group at the law firm Stroock & Stroock & Lavan, responded: "First of all, longevity and mortality swaps are not going to be cleared on exchanges until they become much more standardised than they are at present. We are many years away from that level of standardisation. Consequently, longevity and mortality swaps will remain OTC (over-the-counter) derivatives for the foreseeable future. That being said, Dodd-Frank will likely alter the risk capital requirements for bank counterparties and end users. This may in turn result in higher capital levels, thus making these deals more expensive to execute."

He continued: "It is also unclear whether a longevity cat bond will, in the end, be treated as an asset securitisation. I believe that the final resolution of that issue has not yet been determined. Even if such transactions were subject, for example, to the Dodd-Frank risk retention rules, it remains very unclear how such requirements would operate for this asset class. In all events, the law is still quite unsettled, and there is hope in the insurance-linked securities world that these cat bond structures will ultimately not be treated as asset-backed securities and will thereby avoid some of the risk retention and reporting obligations associated with ABS."

Gordon Fletcher, principal at Mercer Investment Consulting, added: My angle is advising pension funds. I don't think any new financial regulations are coming on the horizon that could impact those in the US We've heard a lot of talk about possible convergence between the US GAAP accounting regulations and the international accounting standards that are adopted in Europe and the UK That would be quite helpful if there was greater convergence because US GAAP doesn't generally support de-risking for pension plans and their sponsors. The sponsors are allowed to take a credit for expected equity returns in their accounts that are not allowed under international accounting standards. If they were to converge, that could promote de-risking at a much faster pace, but it certainly doesn't seem like that's going to happen any time soon."

S&P then turned to the future, asking panellists for their outlook for the market itself.

Fletcher replied: "My colleagues in the UK told me they have quite a pipeline of clients wanting to look at this with varying degrees of seriousness. Certainly there's a number of pension plans in the UK that are well along this process and, having seen two big deals go through recently, there is definite momentum. I think we're going to see more and more of the UK plans looking at these kinds of options, which is going to cause more and more action on the parts of reinsurers who are going to start to fill up their books. I think this could promote more interest in seeking other exits for the longevity risk other than the traditional reinsurer approach. The banks, of course, are going to be very keen to exploit opportunities here."

Stern added: "I share Gordon's view that the continued extension of people's life horizons and the growth of life expectancy will continue to put pressure on various market players to manage proactively their longevity and mortality risks. I do believe that will eventually result in more transactional activity in the field, particularly from pension fund in the US"

He continued: "I also believe that there is a heightened interest in the asset class. There are forces in the markets that are pushing market participants toward uncorrelated types of investments, and longevity and mortality risk transfer is an area that offers potential scale not often found in newer asset classes. I expect that we will see a significant growth over the next couple of years in this area as a result of these trends."