Michael Walker FIA, Associate Partner, Aon
Aon's 2021/22 Global Pension Risk Survey showed that 47 percent of schemes are now targeting buyout with 34 percent targeting self-sufficiency. With the average time to reach long-term targets estimated to be 8.8 years, half of schemes will reach their long-term target before the end of this decade. This is expected to drive a significant increase in demand for insurance transactions in the years ahead, with over 1.5 million members already insured with bulk annuity providers.
Source: Aon Global Pension Risk Survey 2021
Will insurer appetites grow to match demand?
Market participants have long talked about the potential risk of a capacity crunch in the bulk annuity market. Predictions for 2022 from both insurers and advisers suggest a buoyant year ahead with some indicating pension scheme demand for £50bn of risk settlement transactions.
Reassuringly, our November 2021 Bulk Annuity Insurer Survey found that insurer appetites are similarly strong with at least four insurers each aiming to write in excess of £30bn of new transactions over the next five years and one looking at a £50bn objective. With supply and demand growing together, the major task for insurers will be to formulate a plan to prioritise schemes which best suit their book.
"We remain very positive about the future of the bulk annuity market and believe that Legal & General, and the market as a whole, are well placed to meet increasing demand over the next five years and beyond."
Legal & General
What do insurers look for when assessing a bulk annuity opportunity?
Our insurer survey asked bulk annuity providers what tops their priority list when considering which transactions to quote on.
The top two items across all transaction sizes were quality of data and timescales for completion of the transaction. High quality data is a key factor in achieving the best price for transactions of all sizes, removing uncertainty and allowing insurers to offer their best pricing. Clear timescales at the outset are important for large transactions where insurers are tying up substantial amounts of pricing resource, while flexibility in timescales is often key for smaller transactions as insurers manage the demands of multiple transactions across their pricing teams.
For larger transactions trustee requirements for contractual terms and additional security are a focus, with the potential to significantly increase the complexity of negotiations. This is not typically seen at the smaller end of the market where pre-negotiated contracts, such as Aon's Pathway, are used to deliver streamlined transactions.
Source: Aon Bulk Annuity Insurer Survey 2021
What headwinds do insurers see over the next five years?
Insurers were asked about the challenges they see on the horizon, and the responses provided a familiar and wide-ranging list.
A common response was regulatory change, although many noted that this could have either a positive or negative impact both on their appetite to quote and on their pricing.
Similarly, common across most insurers was the ability to source appropriate assets, with many citing investment in Environmental, Social and Governance projects as being a key objective for their business. This will be a welcome focus for many trustee boards, with many setting targets in this vein in their own Statement of Investment Principles.
As with any growing market, finding the right resource has a direct impact on success - and insurers are no different in this regard. Having the right personnel, along with innovative solutions, allows for more efficient delivery of well-priced transactions.
Reinsurance has been a good example of innovation. The structure of Solvency II means many bulk annuity providers began reinsuring longevity risk in 2016. Our survey showed that most providers now seek to reinsure 80%-90% of their longevity risk, with an increasing trend not only to reinsure pensioner longevity risk, but also non-pensioner longevity risk. Further innovation is now being seen, with insurers also reinsuring asset risk as part of some transactions. This approach provides protection to policyholders by diversifying risks, mitigates asset sourcing challenges and also increases insurer capacity for future transactions.
