With a total addressable defined benefit (DB) market size of GBP2.3 trillion, the UK annuity market presents a significant opportunity for insurers and reinsurers as more pension schemes de-risk liabilities, driving demand for longevity reinsurance, according to Fitch’s UK Annuity Market report.
BPA market deals nearly doubled in 1H17 compared with 1H16, reaching GBP5.1 billion, 4 with Pension Insurance Corporation and Legal & General accounting for almost 70% of new deals.
Significant interest from mid-size DB schemes has supported market growth, with transaction sizes ranging between GBP100 million and GBP1 billion. Sales volumes for full-year 2017 are expected to have exceeded 2016 volumes, Fitch said.
Pension schemes are driven to offload DB funding risk after funding gaps have been exacerbated by low-interest rates and the risk of future longevity improvements, causing demand within the bulk purchase annuity (BPA) market to soar.
Because of the significant capital diversification benefits achievable when combining longevity risk with mortality and non-life risks, reinsurers’ longevity risk appetite is expected to remain strong.
As longevity risk is largely reinsured and interest rate risk is minimal due to close matching of assets to annuity cash-flows, the main risk retained on annuity business is credit risk.
In addition, Fitch noted that with the large size and low-frequency of BPAs, pricing risk is significant, however, growth forecast in the number of DB schemes looking to de-risk gives insurers confidence in future deal flow and longevity reinsurance provides a further buffer for pricing risk.
Annuity specialists are expected to continue to show high interest in the market, which offers new entrants opportunity despite significant barriers to entry, provided “capital is available and the market remains attractive,” Fitch said.
However, the availability of suitable assets or potential reinsurance limitations may restrict the attractiveness of the BPA market, thus “a crucial element for future deals structuring is the availability of suitable assets to back long-term liabilities given the detailed S2 ‘matching adjusting’ requirements around the risk, return and maturity characteristics of the asset cash-flows.
“Also, the Prudential Regulation Authority (PRA) has expressed some concerns about off-shore reinsurance of longevity risk, but it appears not to have had an impact on the BPA market so far,” said Fitch.
Despite factors supporting a transformation of the market into a more specialist sector, Fitch believes that the market remains highly competitive, with ample supply of BPA capacity in the short-to-medium term relative to the expected flow of business volume from schemes wishing and able to de-risk, driving opportunity for re/insurers.
