The UK risk settlement marketplace has seen fewer jumbo deals this year than in 2019, but re/insurance broker Aon still expects it to reach more than £50 billion by the end of 2020 as activity increases among mid-sized and smaller schemes.
Earlier in the month, Aon said that the risk settlement market could still reach £50 billion by year’s end despite the difficulties that have arisen from the ongoing COVID-19 pandemic.
Now, in an update on the UK risk settlement market, the global insurance and reinsurance brokerage has said that it expects the market to exceed this milestone for the year as schemes of all sizes take advantage of spare capacity, and utilised some of the innovations from the largest deals of last year.
As the broker highlights, the risk settlement market saw a significant change in the size of schemes coming to market in 2019, with numerous jumbo deals of above £2.5 billion, including those for Asda, National Grid, Rolls-Royce, and Telent. In comparison, so far in 2020, the largest deal that has been announced was one of £2 billion as mid-sized and smaller schemes have been increasingly active in the space.
John Baines, Partner in Aon’s Risk Settlement team, commented: “Nothing much has been ordinary or gone to plan in any market during 2020 and the risk settlement market is not necessarily an exception to that. Even so, we still expect it to reach over £50 billion by the year’s end – and this is despite the lack of the jumbo transactions that we saw last year. In fact, one of the hallmarks of 2020 has been the smartness and adaptability of mid-sized transactions in learning from and embracing the innovations that went into the major transactions of last year.
“There’s often been talk in the pensions industry of innovation being driven by the larger transactions. That has never been truer than in recent years, with schemes able to leverage the scale of transactions and insurer appetite, in order to push the boundaries of what’s possible in the market. We saw that in several of our projects last year, which benefited schemes in both pricing and terms.
“In recent years, we have seen member options exercises integrated with bulk annuity transactions, others have used deferred premiums, accommodated illiquid assets and executed using more complex transaction structures. Large transactions are also paving the way around GMP equalisation solutions for schemes. In all these cases, the scale of the transaction means that fixed costs for insurers in, for example, developing solutions and administration platforms, makes sense.”
Interestingly, Aon notes that market activity has shown that the mechanics and stages of a risk settlement transaction are now far better understood by schemes than even five years ago. In light of this, a growing number of schemes are looking to enter the market when they are actually ready, as opposed to approaching carriers on a more speculative level.
Stephen Purves, Partner in Aon’s risk settlement team, added: “It’s more important than ever that schemes only approach the market when they are properly prepared, and we continue to see the benefits in insurer pricing received on these schemes. More schemes fully understand this now, as well as the value of getting their houses in order before approaching insurers. Moreover, getting the best deal relies on a scheme being 100% clear on what they are trying to achieve, so it can unlock pricing levels which might otherwise have not been available.
“While we are aware of some schemes approaching the market without clarity on the specific aims of the transaction they are pursuing, that is becoming much less common and it’s helping schemes to get the results they need by clearing space in the market. It also accounts for the growth in the number of small schemes moving to buyout which we have seen in the first 10 months of this year – and which we expect to continue into 2021.”
