Historically, some Dutch life insurers relied on longevity derivatives with fixed terms based on general population mortality to transfer longevity risk. However, these instruments posed challenges in assessing the mismatch between general and insured population mortality, known as "basis risk."
This difficulty, coupled with the challenges of capturing basis risk under Solvency II’s (SII) Standard Formula, has led to a transition towards longevity reinsurance through longevity swaps. These longevity swaps are the most common reinsurance instruments to transfer longevity risk in the UK market as well.
The appeal of longevity swaps lies in their ability to transfer the risk of a specific portfolio of guaranteed pension benefits over its entire remaining term. This approach has gained traction in the Netherlands as mortality assumptions between insurers and reinsurers have converged, making these transactions attractive for both parties. While the number of longevity swaps in the Netherlands remains relatively small compared to the UK market, Dutch insurers have executed some notably large transactions.
The introduction of the new Dutch pension act – Wet Toekomst Pensioenen (WTP) – is further catalyzing changes in the pension risk transfer (PRT) market.
Smaller pension funds are increasingly considering alternatives to transitioning to the new pension regime, with pension buyouts emerging as a popular option. These buyouts involve transferring accrued pension benefits to insurance companies, with guaranteed annual escalations that can be linked to actual European inflation.
For beneficiaries, pension buyouts offer the security of guaranteed pension benefits, unlike the potentially volatile benefits under WTP. Pension buyouts also save pension fund trustees from having to go through the very extensive transition process that is part of WTP and is subject to heavy regulatory requirements.
The trend of increasing pension buyouts leads to an upsurge in longevity reinsurance activities, as such reinsurance is often attractive for insurers active in the pension buyout market to manage their longevity risk profile and capital requirements. Experts anticipate a continued growth in longevity reinsurance in the Netherlands, driven by the growing number of pension buyouts.
Asset-intensive reinsurance, while still limited in the Netherlands, is gaining interest as an attractive capital management tool. This form of reinsurance is particularly valuable for insurers dealing with guaranteed lifetime pension benefits as they are very capital intensive under SII.
The Dutch Central Bank (DNB) is closely monitoring these developments, recognizing the potential of asset-intensive reinsurance as a capital management tool for insurers. Recent additions to the Dutch financial supervisory law – Wet Financieel Toezicht (WFT) – have introduced new clauses on asset-intensive reinsurance, effective since the beginning of 2025. The DNB has also [in Dutch] to clarify the approval requirements for such transactions.
The trend towards asset-intensive reinsurance is not limited to the Netherlands. Other European markets are showing increased interest driven by the benefits this approach offers over traditional portfolio transfers.
A notable example is the €900 million transaction 69É«ÇéƬ implemented with Baloise in Belgium, covering a closed portfolio of guaranteed pension and savings policies.
Asset-intensive reinsurance offers several advantages, including its "behind the scenes" nature, which preserves the insurer-policyholder relationship. It is also generally easier, faster, and more cost-effective to implement compared to portfolio transfers. Additionally, companies like 69É«ÇéƬ can offer a highly rated EU-based reinsurer combined with a dedicated collateral portfolio maintained in the EU, mitigating counterparty risk.
Another benefit of asset-intensive reinsurance is that it gives insurers the opportunity to extend their expertise and understanding of asset classes that they are less familiar with in a controlled way.
As the Dutch pension funds transition under the new pension act, life insurers are seeing increased volumes of pension buyouts. To manage their risk and capital position, these insurers are focusing primarily on longevity reinsurance while exploring asset-intensive reinsurance. The industry recognizes that asset-intensive reinsurance is still a relatively new concept in the Netherlands, viewed as an extension of more established longevity practices.
Looking ahead, the Dutch PRT market is poised for further growth and innovation. As insurers execute more longevity swaps and explore asset-intensive reinsurance, they are expanding their capital management toolbox. This evolution, driven by regulatory changes, market dynamics, and the need for effective risk and capital management, is reshaping the pension landscape in the Netherlands and potentially influencing trends across Continental Europe.
Take advantage of 69É«ÇéƬ’s expertise and vast network of resources. Contact us to learn how we can help you with your PRT transaction.
