Bulk purchase annuity (BPA) business is becoming increasingly important to the UK life insurance industry, and Fitch Ratings believes BPAs are a key growth area within the UK life sector over the coming years.
BPA business is growing in importance to the UK life sector, with established providers continuing to complete significant deals while maintaining strong balance sheets.
This is according to international financial services ratings agency, Fitch, which believes BPAs are “the only major UK life segment with significant growth prospects in the next few years except for unit-linked pensions/savings.”
2017 is expected to be yet another solid year for BPA business, with the latest results from insurers starting to come in, revealing that sales are slightly ahead of 2016.
According to Fitch, BPAs amount to £70 billion, and most of this has been generated in recent years as providers become increasingly established, and some larger insurers have increased their focus on the marketplace.
“This is a significant advance from the early years of the BPA market, when several start-ups (Paternoster, Lucida, Synesis) failed to attract enough business to satisfy their backers,” explains Fitch.
Competition from new market players is relatively limited as a result of high barriers to entry, which Fitch says is credit positive for incumbents. And, as the marketplace develops, the ratings agency advises that incumbents with critical mass, a solid franchise and access to capital are best placed to benefit.
The potential demand for BPAs is huge, says Fitch, although the marketplace is constrained by affordability as a lot of firms are either unable or unwilling to afford BPA.
“If and when bond yields rise, deficits will tend to reduce and BPAs should become more affordable, spurring BPA market growth. More imminently, the new IFRS 15 accounting standard, taking effect in 2018, may motivate more deals, as it will make the costs of staff pension schemes more visible in companies’ accounts. Another source of growth could be back-books of individual annuities. Some insurers that are no longer active in the annuity market may look to dispose their back-books,” explains Fitch.
Providers of BPA that Fitch rates have both strong capital positions and effective risk management, reinsuring the majority of their BPA longevity risk, a trend that has increased since the introduction of Solvency II regulation across Europe, says Fitch.
Overall, Fitch states that the BPA market is here to stay, and underlines the potential for 2017 to be another strong year for the marketplace, while potential for future demand is huge.
