Consultants’ hopes that the UK de-risking market would rebound in 2013 appear to have been fulfilled. This follows an underwhelming 2012 during which transaction volumes fell by a half.
By the end of December, more than £14bn (€17bn) in pension liabilities had been insured with providers – helped by three transactions
in December worth a combined £5.2bn. Additionally, a growing national and international awareness of the benefits of a market-based solution could see transactions grow even further in 2014.
Among bulk annuity providers, claiming £5.5bn of activity over the year, Pension Insurance Corporation dominated, writing more than half of the business, according to figures compiled by Aon Hewitt.
Insurer Legal & General (L&G) ranked third, behind Rothesay Life, in terms of volumes of business but, with 64 deals, attracted almost double the number of clients compared with closest rival Aviva.
Aerospace giant BAE Systems repeatedly took advantage of market conditions, in February transferring £2.7bn of liabilities to L&G and reinsurer Hannover Re, and again in December striking a further £1.7bn deal with the UK insurer, which ended up claiming more than 40% of all transaction volumes.
Concerns that increased de-risking activity in North America would saturate the reinsurance market do not seem to have been realised. Nonetheless, the Bank for International Settlements (BIS) late last year endeavoured to determine how best to avoid a “breakdown” of the system and create a viable longevity risk transfer market.
The final report, released by the BIS working group in December, shied away from giving a definitive verdict on where longevity risk should be held – by insurers, reinsurers or capital markets – and said it was up to nations’ individual policymakers to decide.
However, the paper said governments should consider creating viable longevity risk transfer (LRT) markets to ensure providers retain sufficient capacity to write new business. But it warned the approach was not without risks: “The transfer of risk from a mature sector with significant capital requirements to an LRT market, that may not have these safeguards, might not be in the employees’ best interests, and may even create new systemic risks,” the paper said.
It urged supervisors to work closely with each other to avoid regulatory arbitrage, “especially in jurisdictions where pension funds and (re)insurers do not have the same regulatory/supervisory authority”, a problem found in the UK due to that nation’s tripartite system of regulation.
The BIS paper also warned of the dangers of failing to assess longevity adequately. It noted that “relatively lenient treatment of pension obligations in some jurisdictions has been noted as a market distortion that needs to be better justified by policymakers”.
While this is not the case in the UK – largely due to the granularity available in mortality tables that are spurring longevity risk transfers such as the £2.5bn deal undertaken by the pension fund of AstraZeneca in December – underestimating the risk could have a knock-on effect for UK providers if they destabilise global ones.
Aon Hewitt also sees the opportunity for market-based solutions to develop finally, after Deutsche Bank launched its Longevity Experience Options (LEO) index.
“LEO may find a home either at the smaller end of the pension scheme market where bespoke indemnity cover is not currently available, or with insurance companies seeking to mitigate specific longevity risks that feature in their capital reserving requirements,” the consultancy said.
“Any growth in index solutions is helpful to encouraging wider investment in the settlement market.”
No comments yet