As Just Retirement and Partnership merge to become JRP group, Kristian Brunt-Seymour looks at how it could impact competition in the medical underwritten bulk annuity market.
At a glance:
- JRP group is likely to dominate the medically underwritten market
- The merger could be a short-term disrupter regarding market competitiveness
- The attraction of the medically underwritten market may draw in market entrants
Last year was a record-breaking one for medically underwritten bulk annuities as new deals brought in over £1.1bn of business.
This market has really taken off over the past three years, reaching a peak for individual deals when Legal and General (L&G) completed the biggest ever MU buy-in with Kingfisher last December.
The main benefit of using a medical underwriter is it can offer a lower price for a bulk annuity if specific scheme members may be in worse health than anticipated by a traditional insurer. The Pensions Institute's report in January predicted a boom in this market amid expected increase in demand.
The long-anticipated merger of Just Retirement and Partnership has been welcomed for bringing greater strength to the wider bulk annuity market as well as medical underwriting (MU).
However, others have questioned how the merger that completed in early April resulting in JRP group may affect the competitiveness of the MU market.
Just Retirement and Partnership collectively made up 80% of MU buy-in deals by volume and over 90% by number in 2015, according to figures from Lane Clark and Peacock (LCP). Therefore JRP will dominate the market going forward if they maintain their collective market share.
JRP currently operates as two separate institutions, with Just Retirement owning 60% of the new firm and Partnership owning the rest of the business. L&G and Aviva also offer MU bulk annuities, while there is talk of other insurers keen to enter the market soon.
Just Retirement group communications director Stephen Lowe says: "Just Retirement and Partnership have positively disrupted the defined benefit de-risking market to bring improved value to the clients of pension consultants by deploying our unrivalled intellectual property."
"This is a dynamic sector and currently product providers are only scratching the surface of the market opportunity - so it's not in any provider's interest to place market growth at risk." Stephen Lowe, Just Retirement.
As MU represents just a small portion of bulk annuities with a 9.5% share of the market in 2015, the JRP is unlikely to have a major impact competition in the wider bulk annuity business.
However, consultants warn the group's dominance in MU may make trustees and providers feel uncomfortable.
"With over 90% of all medically underwritten buy-ins in 2015 being completed by Just Retirement and Partnership, there is no doubt the merger will reduce competition in that segment of the market," says LCP partner Charlie Finch.
"Pension schemes will be very reluctant to enter a market where there is only one main party quoting the business. There can be reassurances about value for money but the lack of competition is always going to concern clients."
Hymans Robertson actuary Michael Anderson says: "It is fair to say the new JRP will be dominant in the medically underwritten market, particularly now LV= have confirmed that it has put its plans to enter the market on hold.
"If L&G continues to focus on larger transactions in this space and Aviva does not increase its activity, smaller schemes or schemes looking to carry out smaller transactions of sub £100m might effectively have only one provider to go to."
However Just Retirement's Lowe says: "Medical underwriting is a mechanism to determine price and is not a method of defining a market boundary. On the theme of competition, there were new entrants last year and we expect there will be new entrants this year. This is a dynamic sector and currently product providers are only scratching the surface of the market opportunity – so it's not in any provider's interest to place market growth at risk."
Other entrants may offer lower pricing to gain traction in the market, balancing out JRP's dominance.
"If you look back at the market over the past several years there have been many new entrants followed by consolidation," says Willis Towers Watson senior de-risking consultant Shelly Beard, who says there is interest from various parties. "Competition has always been there and schemes can take a lot of comfort from new entrants wanting to come in and shake up the market."
Lincoln Pensions managing director Alex Hutton-Mills believes the merger will be a "short-term disrupter" to market competitiveness.
"I'm sure the market will respond accordingly and it will be important for other insurers to find ways of doing deals that JRP is currently undertaking," he says. "The market will likely respond by bringing in MU more broadly as part of a suit of options for transactions, meaning the practice will become more commonplace."
Impact on pricing
JLT Employee Benefits head of buyout Tiziana Perrella points out that raising prices would likely to have a detrimental impact on business volumes as trustees would just go down the conventional non-medically underwritten market route instead.
"The key is both the pricing that JRP group offers and how the structure of the newly merged group will turn out, both of which we don't know at this point," Perrella says. "However, the existence of a non-medically underwritten market will push them into pricing effectively and providing value for money on reasonable rates. If the pricing goes up too far then they may kill the MU market because people will feel more inclined to follow a more definitive bulk annuity process."
She says as the two groups currently price differently since they act according to their own medical data, they may have to compromise on pricing going forward.
"If their costs are not value for money in relation to their competitors then they may feel the need to reassess their pricing accordingly," she adds.
Just Retirement and Partnership will continue to compete against a wide variety of other de-risking options, as medically underwritten bulk annuities are not the only option for pensions schemes.
"Trustees are only going to transact if it makes financial sense so for any provider to effectively price themselves out of the market would make very little sense for companies which are committed to growing this sector," says Lowe.
He adds: "We have introduced innovations such as post-deal underwriting, where clients can medically underwrite a transaction after they have secured a market leading non-underwritten rate. This enables pension schemes to access the benefits of medical underwriting while shopping around for the most competitive prices among non-medically underwritten insurers."
It is too early to say exactly how the merger will impact the medically underwritten bulk annuity market. While JRP will be the dominant MU provider at first, other insurers are likely to enter the market at some point. Competitive pricing and access to a wider set of providers can only be a good thing for pension schemes.
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