Aon has reported that the risk settlement market presents many attractive opportunities for re/insurers in 2018, with the strong pricing seen in 2017 expected to continue throughout the coming year.
The projection was part of Aon’s ‘Risk Settlement Market 2018’ report, which analysed 2017’s market trends and generated predictions for the coming year.
Aon’s report observed that although 2017 started slowly, it eventually brought over £18 billion of risk transferred to bulk annuity and longevity swap providers and saw an improvement by over 10% of buyout positions for many pension schemes.
Martin Bird, Senior Partner and Head of Risk Settlement at Aon, said: “I am confident that 2018 will also be a good year for pension de-risking, with improved pension scheme funding levels and better insurer pricing set to make settlement more affordable than ever.
“The bulk annuity market is set for a record year with transactions potentially reaching £30 billion and we expect a number of full scheme buyouts to enter the market as well as there being a continued flow of pensioner buy-in deals.”
Aon also found that the bulk annuity market thrived in 2017, with £12.3 billion of transactions made as re/insurers successfully adjusted their business models to Solvency II requirements and readily engaged in risk settlement deals with company pension schemes.
John Baines, Partner at Aon, said: “We saw a large number of competitive auctions in 2017, with many providers showing their desire to do business with schemes with different risk profiles, with either pensioner-only deals or full scheme transactions.
“Despite a year of record pricing, there were no transactions over £1bn. In part, this reflected the trend towards securing benefits in tranches – either from repeat buyers, who had already secured much of their pensioner liabilities and were simply ‘topping up’, or from schemes taking a more gradual approach to integrating annuities into funding and investment strategies.”
The report observed that re/insurers are trying to support better pricing by seeking higher-yielding alternatives to investment in corporate bonds, due in part to a relatively stable regulatory environment, a competitive market, and government incentives for infrastructure investment.
Mike Edwards, Partner at Aon, explained: “This innovation in sourcing alternative assets is key to the annuity market’s development, as the level of issuance of listed credit (the traditional asset class for insurers) has been volatile and as credit spreads have reduced in recent years.
“The success of insurers in this area has been a major factor that has allowed them to offer the very attractive pricing. We believe that these capabilities will be increasingly critical in the future if the market is to cope with the increased demand that we are anticipating.”
Bulk annuity deals were found to have been attractive for schemes of all sizes, with smaller schemes more likely to be able to obtain competitive quotes from insurers, provided they could convincingly prove they were well prepared to complete a transaction.
Aon also observed that more schemes are adapting their existing investment strategies by implementing de-risking frameworks in order to develop a phased approach to re/insurance.
Edwards continued: “In an increasingly busy market, schemes that have already gone through a transaction are more likely to get the best deals. Insurers have greater certainty that they will transact, and scheme stakeholders will be sufficiently experienced and nimble to seek and react to opportunities as soon as they arise.”
Additionally, the report forecast a busy year for the longevity markets in 2018, as schemes and sponsors are expected to continue exploring the sizing and structuring of longevity deals, and as longevity re/insurers continue to adjust their pricing in response to recent higher rates of mortality.
Aon observed that longevity swap activity by UK pension schemes improved significantly by the end of 2017, with transactions ranging from between £300 million and £3.4 billion in size.
Overall, Aon recorded a threefold increase on longevity swaps between 2016 and 2017, with longevity risk hedged for a total of £6.4 billion of liabilities.
PIC and L&G continued to dominate market share over 2017, but Aviva also grew significantly, with business rising from £0.9 billion to over £2 billion, and with a busy start to 2018 that indicates it is setting up for further volumes increases.