Leah Evans, Partner, Aon
Earlier this year, Aon invited all eight active UK bulk annuity insurers (prior to M&G entering the market) to participate in our 2023 Risk Settlement Insurers Survey. The survey covered a series of topics, including business volumes expected in 2023 and beyond, preferences for specific scheme types, asset portfolio considerations and potential headwinds (and solutions) in the market.
We combined the research responses with information gathered on insurer volumes for all active insurers up to H1 2023, as well as the insurers' positions on some of the key topics affecting many pension schemes.
Managing business volumes
It is widely predicted that 2023 will be a record year for the bulk annuity market, with full year volumes potentially exceeding £50 billion, compared to the previous high of £43.8 billion in 2019. As we look beyond 2023, we asked insurers to indicate the volumes of business they expect to write in the next five years. 85 percent of responses received indicated that they intended to increase their business volumes in a sustainable way to meet demand, while the remainder suggested they would seek to retain stable targets. This will be much welcomed news by schemes targeting buyout as their endgame. In addition to this, we have already seen one new entrant with M&G announcing their first transactions in September, with further new entrants expected.
When asked about potential headwinds against their businesses, all the insurers identified capacity constraints as one of the key challenges in meeting demand, with a limited pool of people available to prepare schemes for market and to execute a transaction. This resource is facing even greater pressure as a result of the rapid acceleration of funding levels and increased appetite from pension schemes to make inroads towards their endgame.
Another common reported headwind was asset sourcing. While there are guidelines for the assets in which insurers can invest, each insurer positions their portfolio differently to suit their back book of liabilities as well as their plans for future business. A hot topic in the risk settlement market over the last 12 months has been the unexpected position in which many schemes found themselves, where the proportion of illiquids they held had suddenly increased following the mini-budget in September 2022. Efficiently re-structuring a portfolio after this in an attempt to match insurer pricing can be difficult. To do so, it continues to be important to enlist the help of a risk settlement investment specialist who understands the underlying insurer portfolios and can advise accordingly.
Insurers are employing a combination of approaches to combat any market issues, including:
- Recruitment: Insurers have told us they are looking to increase their headcount to meet market demand, allowing them to quote on a greater number of transactions.
- Streamlined processes: In order to keep up with the number of cases coming to market, insurers are investing heavily in streamlining processes both internally and for the schemes coming to market, to create efficiencies and release capacity.
- Exclusive transactions: For smaller deals insurers are now in many cases, stipulating that they will only quote on an exclusive basis, i.e. working with a single insurer from the outset to achieve a transaction.
- Illiquid Holdings: Helpfully, more than 80% of insurers suggested they would consider illiquid holdings as part of a transaction, and many of them are creating solutions to allow this hurdle to feel much easier to overcome. Having said that, we expect it would be unlikely that insurers will accept large proportions of these on every deal as these assets currently do not align with the reserving requirements placed on insurers.
Focus on triaging
With the unprecedented number of schemes looking to transact with an insurer and the identified capacity issues, insurers are being more selective about the cases they quote on.
We asked the insurers to identify the key factors that they consider in their triaging process when deciding whether to quote on a case. The top three factors insurers consider for all types of scheme are:
- Quality of data
- Benefit structure
- Timescales to transact
Does the process vary with scheme / transaction size?
The short answer is yes.
At the smaller end of the market (sub-£100 million pension schemes), and since insurer resource is very limited, only the most well-prepared schemes will generate significant traction with insurers. This means making sure the data is of good quality, the benefit specification has been legally signed off, the trustees and sponsor are aligned in their objectives and there is flexibility to work to insurers' required timescales as they juggle resource to meet existing (and future) commitments. In our survey, these areas were the overwhelming drivers for insurer triaging for small schemes, with little mention of other factors.
As transaction size increases, there is often more flexibility from the insurer on when to quote and on what other factors to take into consideration. For example, almost half of the insurers in the survey noted governance arrangements as a triaging factor for mid-sized schemes (£100 million - £1 billion). This size of scheme is often more complex and so a key driver for insurers is reassurance that a transaction is likely to complete. Insurers will want to know that trustees and sponsor have agreed key objectives and that there is an efficient decision-making structure in place, e.g. a joint working group with trustee and sponsor representatives.
At the large end of the market (£1 billion+) the relative importance of the various triaging factors varies and can provide more flexibility to large schemes. In some cases, the appeal of writing a large transaction can be sufficiently important that any complex aspects of the transaction picked up in the triage process may be viewed as less significant by the insurer. One important factor that insurers do consider at this size is any requirement for additional security arrangements, e.g. termination rights or collateral. Insurers will consider how onerous any requests such as this are when deciding on whether to quote or not.
The key lesson for schemes is that they need to be prepared to attract insurer engagement. including having agreement between the trustees and sponsor on the journey to settlement strategy, and to have developed a comprehensive plan to avoid missed opportunities along the way.
Choosing the right risk settlement adviser will reduce key risks and allow for the most efficient execution of a scheme's plan. For further information on how Aon can help you on your endgame journey and to obtain attractive quotes with the right insurer engagement strategy, please do get in touch
For more details on the points raised in this article, and to view the full survey report, please click here.
