In this article ¨C based on an article published in Dutch in June 2026 in De Actuaris,1 the magazine of the Dutch actuarial profession ¨C »»ÆÞ¾ãÀÖ²¿ expert ´¡²Ô»å°ù¨¦ de Vries details asset-intensive reinsurance solutions, how they work, and how they are best structured to maximize value.
Reinsurance is an effective and flexible way for an insurer to transfer risks and manage its capital position. ¡°Asset-Intensive Reinsurance¡± (AIR) is the term used when investment risk is being transferred alongside biometric risks.
AIR has been executed numerous times across multiple markets by a wide range of insurers and has been subject to thorough review by insurers, advisors, and supervisory authorities.
Insurance portfolios underlying AIR contain guaranteed benefits ¨C for example, guaranteed lifelong pension payments. Under this reinsurance solution, the reinsurer is liable for those guaranteed benefits over the full term of the liabilities and therefore covers the corresponding biometric risks, such as longevity risk for pension benefits or surrender and mortality risk for funeral expense insurance policies.
AIR has been subject to increased attention from regulatory and supervisory authorities over recent years. The aim of this article is to explain what AIR is and how it works.
AIR, which also commonly is referred to as Funded Re, consists of several agreements among the insurer, the reinsurer, and the custodian. Other parties, such as an external asset manager, may be a part of the AIR agreement. Figure 1 shows an overview of the key agreements among these parties and resulting payments during the term of the AIR, based on funds transferred.
The core of AIR is the reinsurance agreement between the insurer and the reinsurer, which sets out a wide range of terms. In addition to the payments ¨C who pays what, when, and under which circumstances ¨C the agreement also specifies how to deal with data errors and under which exceptional circumstances the parties may terminate the agreement early, including how the contract is then settled financially.
In exchange for a single premium (Initial Consideration) paid by the insurer at the start of the AIR, the reinsurer assumes the agreed obligations of the underlying insurance portfolio ¨C insurance benefits and claims. Future premiums from policyholders may also be included.
The single premium can be viewed as the price of the AIR and is therefore a key component. The reinsurer determines this price after an extensive analysis of the underlying insurance liabilities, as well as of the risks and expected returns for the agreed collateral that forms part of the AIR.
Once the reinsurer has determined the single premium, it is useful to express this amount in other ways during the structuring of the AIR. These other ways refer to relevant market terms, such as interest rates.
A common approach is to express the single premium as the uplift (spread) relative to an interest rate curve that would apply so that the present value of the best estimate benefits (claims) equals the single premium. Another approach is to express the single premium as a percentage of the Best Estimate Liability (BEL) under Solvency II (SII) for the underlying portfolio.
After the single premium is settled, the insurer has a counterparty exposure to the reinsurer because all future payments under the AIR ¨C aside from any future premiums ¨C are owed to the insurer. To mitigate that counterparty risk, the reinsurer can provide collateral within a robust legal framework ¨C the collateral framework.
Although this collateral and the related arrangements are an important part of AIR, it is a separate component of the reinsurance, distinct from the insurance benefits ¨C the claims ¨C the reinsurer owes to the insurer based on the underlying insurance portfolio.
The reinsurer bears the investment risk of the collateral. To manage that risk, the reinsurer will reposition and manage the collateral so that it aligns with the insurance liabilities in the underlying portfolio and its own investment risk appetite.
Within AIR, there are two ways to mitigate the insurer¡¯s credit risk to the reinsurer: Funds Withheld or Funds Transferred (or a combination of both).
In a Funds Withheld setup, legal title to the assets, corresponding to the single premium, remains with the insurer, while economic ownership ¨C the returns as well as the risks ¨C is transferred to the reinsurer.
A key disadvantage of Funds Withheld is that it limits the reinsurer¡¯s ability to manage the underlying assets, which increases the reinsurer¡¯s investment risk compared with the Funds Transferred approach.
This article focuses on a Funds Transferred setup whereby the assets are held with a (local) custodian on an investment account newly established for the specific AIR. The account is owned by the reinsurer, but the assets on the account are fully secured by the custodian; neither party can withdraw assets apart from pre-agreed events or by mutual agreement. This means the insurer may instruct the custodian to transfer the assets to the insurer if the reinsurer fails to meet its obligations under the AIR. In addition, the reinsurer may not use these assets to meet obligations outside the AIR.
All of this is carefully documented in various agreements between the three parties involved in this part of the AIR via the collateral framework.
During the term of the AIR, the insurer can view which assets are held on the pledged account at any time by logging into the custodian¡¯s system. The single premium is also transferred directly to this account, so the insurer can track that payment as well. The reinsurer will also pay benefits under the AIR from this pledged account but benefit payments are not capped by the amount of collateral.
During the term of the AIR, the reinsurer is responsible for ensuring that the collateral meets the agreed investment guidelines and limits. If the collateral no longer complies, the reinsurer is obliged to adjust the collateral and, if necessary, post additional collateral to the pledged account.
Over time, the collateral requirement will reduce due to the claims paid to the insurer but the collateral requirement can also increase due to changes in market conditions or actuarial developments such as differences between the expected and actual mortality in the underlying portfolio.
As long as the reinsurer meets its obligations under the AIR, the assets are the legal and economic property of the reinsurer, so the reinsurer bears the risk and receives the proceeds of the collateral.
Parallels can be drawn between an AIR and longevity reinsurance in the form of a longevity swap on a portfolio of guaranteed lifelong pension policies. The insurance benefits under the AIR directly correspond to the floating leg of the longevity swap. In addition, the single premium can be viewed as the present value of the fixed leg, discounted using the term structure of interest rates, including the spread, as mentioned above. Here, the reinsurance premium (gross-up factor/loading) that forms part of the fixed leg of a longevity swap, is excluded.
AIR on a Funds Transferred basis as described in this article is not a theoretical construct. This structure has been executed by multiple insurers in different jurisdictions. In each case, the AIR framework ¨C including its legal, operational, and collateral arrangements ¨C has been subject to thorough review by insurers, advisors, and supervisory authorities.
Recent implementations, including transactions completed by »»ÆÞ¾ãÀÖ²¿ with and Allianz in Switzerland, demonstrate the robustness and practicality of this approach. These transactions reflect consistent regulatory scrutiny and market acceptance of AIR on a Funds Transferred basis as a sound reinsurance solution for portfolios with guaranteed benefits.
Taken together, this track record underscores that AIR on a Funds Transferred basis is a well-established and resilient mechanism for transferring investment risk, managing capital, and supporting long term guarantees. AIR forms a valuable and proven addition to the risk management toolbox of insurance companies.
Contact us today to explore what an AIR agreement with »»ÆÞ¾ãÀÖ²¿ could look like for your business.
