Deutsche Bank has completed a €12bn longevity swap with AEGON. The transaction is the first to be targeted directly to the capital markets and the first longevity transaction based on population data in continental Europe, the firms say.

The swap is based on Dutch population data that is applied to a synthetic portfolio and will enable AEGON to hedge the liabilities on a portion of its annuity book. By distributing the risk of the trade in the capital markets, Deutsche Bank is able to manage the longevity risk taken on through the transaction. Use of the capital market significantly increases the capacity for hedging longevity risk that already exists in the reinsurance market, Deutsche says.

Clare Hennings, head of structured insurance solutions at Deutsche Bank, comments: "Deutsche Bank continues to use its extensive experience in longevity risk management to address the complexities of the economic, regulatory and market environment faced by both our clients and investors. We believe this market will continue to grow as insurance companies and pension funds look at new ways to manage their liabilities while investors seek diversified investment opportunities."

Meanwhile, RMS has announced that it has conducted a mortality risk analysis of the Dutch population to help capital markets investors quantify Dutch longevity risk. This analysis incorporates estimates of lifestyle trend changes, medical advances and future health care environments specific to the Dutch population.

"Previous longevity models for the Netherlands have struggled to incorporate future developments in medical science into mortality improvement projections. The RMS analysis uses 'cause of improvement' modelling for probabilistic longevity scenario generation," RMS says.

The firm adds that Netherlands population presents some specific challenges for modelling future mortality improvement scenarios. It has experienced high mortality improvement rates over the past decade, with up to 4% annual improvement rates across retired ages.

The Netherlands has higher smoking rates than other European countries, but slightly fewer deaths from cardiovascular disease. It has lower obesity levels, higher standards of health care, and a marked birth cohort effect around the birth year of 1936, some six years later than the similar cohort effect in United Kingdom.

Further, RMS notes: "In 2010, the increasing levels of mortality improvements seen earlier in the decade were reflected in a major revision of actuarial tables by the Dutch Actuarial Society, which caused a significant increase in liabilities for many pension funds. This results in an increasing demand for longevity protection in the Netherlands."

RMS says that its approach to longevity risk modelling is more transparent than a statistical model and "is rapidly gaining acceptance within the pension and annuity markets".

Traditional approaches involve extrapolation of historical mortality rate volatility out into the future. The RMS model begins with current mortality levels and trends, and then explores scenarios for future trends in the different causes of mortality improvement, incorporating likely timelines for medical developments that are currently in the lab or new drugs at different stages of approval processes.