Boost in UK medical bulk annuities as Gilts provide discount pricing

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The value of UK medically underwritten buy-in market reached record levels in 2014, backed by tremendous growth in the final quarter and predictions it will reach £1.5bn (€2bn) by the end of the current year.

Medically underwritten buy-in insurance contracts reached nearly £600m over 2014, with close to three-quarters of deals being completed in the final quarter, figures from UK consultancy Hymans Robertson showed.

The figure compares to just just £91m in deals during 2013 – when the first medically underwritten transaction first took place.

Medically underwritten insurance products account for individual members’ health status, with insurers refining pricing with greater understanding of risk and no need for prudency margins.

Overall, the bulk annuities market – of which medically underwritten is a tiny fraction – grew significantly over the last year with pensioner buy-in pricing being cheaper than matching payment liabilities with UK Gilts, due to the competitive market and Gilt prices increasing.

Hymans Robertson partner James Mullins said the number of bulk annuity deals completed in 2014 stood at an estimated 180, of which 22 were medically underwritten. However, in terms of value, the market accounted for just 5% of all deals.

Mullins said the firm’s experience was medically underwritten buy-ins were pricing around 5% below traditional contracts, often closer to technical provisions.

“This means that pension schemes could exchange Gilts for a medically underwritten buy-in and get a matching asset without any cost implications, nor any need to increase company contributions,” he added.

Consultancy Aon Hewitt said it saw medically underwritten pricing value pensioner liabilities using a discount rate of Gilt yields plus 0.6% – sometimes 10% below traditional pricing.

Hymans Robertson said it expected somewhere between £500m and £1bn of medically-underwritten business in 2015, around 10% of total bulk annuity value, with insurer pipelines looking strong.

The market is split between two providers, Partnership and Just Retirement, both firms known in the medically underwriting space, particularly for providing individual annuities.

However, since the UK Budget removed compulsion around purchasing annuities from April 2015, both firms have pushed to grow their bulk annuity business.

Hymans Robertson said traditional bulk annuity market leader, Legal & General (L&G), was among other providers looking to enter the medically underwritten space.

“Given the rapid growth in the area, insurers are increasingly active and interested in this part of the market. We expect to see other insurance companies offer medically underwritten buy-ins during 2015,” Mullins said.

In the aftermath of the 2014 Budget, IPE reported insurer LV= was investigating the possibility of entering the UK medically underwritten bulk annuity market after expecting a severe hit to its individual business.

Last year also saw the first medically underwritten buyout deal which covered deferred members and pensioners, with Hymans Robertson anticipating further growth in this space.

Overall, 2014’s bulk annuity market reached a record £12bn in transactions amid competitive pricing from insurers and a boost in funding levels from 2013’s equity performance.

It hosted record-breaking deals in both product spaces with a £3.6bn buy-in arranged by the ICI Pension Fund, and the TRW pension fund handing over £2.5bn in liabilities with a buyout.

A recent report from L&G said close to half of UK pension funds would use insurance products to sure-up liabilities within the next five years, two-thirds of which would be a bulk annuity.

The findings concluded expecting significant growth in the market, as insurer pricing tension increased after the Budget hit individual annuity business, and scheme’s liability management allowed better access to markets.