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Court ruling on Prudential/Rothesay expected to disrupt de-risking plans: Fitch

28th August 2019 - Author: Luke Gallin

A recent UK High Court judgement to block Prudential’s proposed £12 billion annuities transfer to Rothesay Life, is a sign that some insurers will likely have to retain business that they hoped to offload, warns Fitch Ratings.

Longevity imageThe proposed Part VII portfolio transfer from Prudential to Rothesay Life, which followed a £12 billion reinsurance arrangement between the pair first announced in 2018, consisted of an annuity book containing around 400,000 policyholders and is part of the firm’s plans to demerge its UK & Europe operations.

Earlier this month, the transfer was blocked by the High Court, and in light of this, Fitch has said that there could be challenges for UK life insurers looking to offload their annuity risks.

“We believe that the ruling by the High Court of England and Wales sets a precedent that will restrict insurers’ ability to transfer annuities to smaller or less-established companies, such as Rothesay, which was only created in 2007,” says Fitch.

In some instances, the ratings agency notes that offering incentives to ensure policyholders are more open to a transfer might help proceedings, but warns that nevertheless, it expects that some firms will have to retain business that they were hoping to offload.

Instead, says Fitch, insurers might have to make greater use of reinsurance or other forms of risk transfer to reduce their annuity risks, adding that while this might meet de-risking needs, it might well be more costly.

Clearly, this would be good news for reinsurers in the longevity space as it could well lead to increased demand, but it’s not without additional risks.

“The insurer would have to hold capital for counterparty risk and would still be responsible for administering the contracts and making payments,” says Fitch.

Interestingly, the reinsurance arrangement between Prudential and Rothesay remains in place and has not been impacted by the High Court’s decision to block the full portfolio transfer.

According to Fitch, the judge highlighted important metrics which policyholders use when selecting an annuity provider, such as the age and reputation of the provider, as well as the available financial resources over the length of an annuity contract.

Furthermore, Fitch explains that those policyholders that are against the transfer would not have the option to avoid it by either cashing in or switching provider, as annuity contracts, in contrast to other life solutions, are typically locked in for life and do not allow for these benefits.

“We do not believe the ruling has implications for transfers of other types of business, in which contracts are shorter or policyholders are able to cash in their policy and switch provider, and the ruling made clear that the considerations of the case do not extend to consolidation of life insurance activities within a single insurance group – a key activity for UK life consolidation specialists, such as Phoenix and ReAssure.

“The ruling also seems unlikely to affect prospects for bulk purchase annuity deals, where insurers take on annuity liabilities from defined benefit pension schemes – an important source of growth for the UK life sector,” explains Fitch.

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