Bulk purchase annuities (BPA) within the UK provide one of the best long-term opportunities within the European insurance sector, says Moody’s in a new note.
According to the agency, the market’s ‘strong growth prospects and healthy profit margins’ are ‘credit positive’ for the eight life insurers that are currently within the market.
The authors of the report wrote: “Demand for BPAs has been growing strongly in the UK as corporates increasingly seek to de-risk their DB schemes, which can cost more than initially expected because of lengthening average lifespans (longevity risk) or inflation. Low interest rates also increase the risk that the assets DB pension funds are invested in will not generate sufficient returns to fully cover the pension scheme’s expected future cash outflows.”
They added: “The UK BPA market’s strong growth prospects and healthy profit margins are credit positive for all eight life insurers that currently participate in it. Prerequisites for competing effectively in this market are the necessary resources and technical expertise, including the ability to source illiquid assets.”
Overall, it concluded that the BPA market growth is currently credit positive.
The authors wrote: “All participating life insurers will benefit from sustained growth and attractive profit margins. The profit uplift will be particularly strong for specialist BPA players, although their lack of product and geographic diversity and high reliance on longevity reinsurance will constrain their credit strength. Larger players with diverse operations are more insulated from BPA risks, and should remain competitive even if market dynamics become more challenging.”
The note also looked at what may have if longevity reinsurance became more significantly expensive. It concluded that more diverse players would have an advantage if this came to fruition.
The authors added: “Diversified insurers are also less dependent on BPA earnings, which could support price discipline when bidding for BPA business, particularly if market conditions become more challenging.”
However, they warned: “While reinsurance capacity for longevity risk is plentiful today, demand for longevity reinsurance could outstrip supply as the BPA market expands. Insurers with robust solvency ratios would be better placed in this scenario, as they have greater capacity to retain longevity risk.”
Overall, Moody’s intimated the market will continue to grow, citing the Pension Schemes Act 2021.
According to the authors: “We expect the COVID 19 related financial market shock of 2020 to increase many employers’ already strong desire to off load the financial and longevity risks associated with their DB pension plans. The Pension Schemes Act 2021, which requires UK DB scheme trustees to set out long-term objectives, will further drive demand for de-risking strategies among corporates as regulatory oversight and scrutiny increases.”
