Strong pipelines, greater engagement from smaller schemes and innovation driving improved buy-in affordability are some of the key developments expected to feature in the de-risking market in 2017, according to Willis Towers Watson.
The firm is predicting that over GBP30 billion of liabilities will be insured in 2017, through buy-ins, buyouts and longevity swaps. This is a significant year-on-year increase, returning to the levels of activity observed in 2014 (GBP39 billion) and 2015 (GBP18 billion), following a slower 2016 (GBP11 billion) as participants allowed for the bedding-in of Solvency II, back books distracted some market participants from new pensions transactions and events such as the referendum caused uncertainty and headwinds across the market.
Overall, GBP9 billion of liabilities were hedged through via around 100 bulk annuities in 2016 (GBP4 billion of which was in the fourth quarter), whilst only GBP2 billion of longevity risk was passed by pension schemes into the reinsurance market. This compares to GBP12.3 billion across 175 bulk annuity deals and GBP6 billion of longevity swaps in 2015.
Shelly Beard (pictured), director in Willis Towers Watson’s de-risking team, says: “2016 was very much a year for taking stock, with uncertainty following the UK’s EU referendum certainly subduing the overall level of activity taking place. Insurers have focused on their Solvency II capital positions, back book transactions and building up their pricing team capabilities. Relative to the preceding 18 months, the second half of 2016 saw a marked increase in the value available in the bulk annuity market. Consequently, providers are entering the New Year with strong pipelines and several deals expected to trade in January, and more of our clients are approaching the market than ever, so we expect 2017 to start from a very healthy position in terms of appetite and deal pipelines.”
According to Willis Towers Watson, an overall increase in the regularity and volume of longevity risk being passed into the reinsurance market is allowing smaller schemes to be more active in the longevity hedging market, as they benefit from “big scheme” pricing, making longevity hedging programmes more attractive.
“Contracts for smaller schemes looking to hedge against longevity are now easier to implement, as their structure becomes more streamlined over time. Alongside greater access for all to “big scheme pricing”, this is really a significant trend to watch over the coming year, as prohibitive cost barriers start to be eroded. In the second half of 2015 and 2016, the longevity reinsurance market was dominated by insurers transferring the longevity risk associated with their new and existing bulk annuities; in 2017 we expect reinsurers’ focus to return to the pensions market and for competitive pricing to be available,” says Beard.
At the same time that schemes are considering de-risking strategies for the first time, many which undertook buy-in transactions over the past few years are expected to return to the market as they look to further de-risk liabilities. In 2016, the firm advised a scheme on its fifth buy-in, having started its buy-in program in 1999.
For those schemes looking to transact buy-ins and buyouts in 2017, Willis Towers Watson also identified the continuing competition from “back book” business, with a number of insurers looking to transfer away their historic bulk and individual annuity business. This was the case in 2016 when Aegon transferred GBP9 billion of liabilities to Rothesay Life and Legal & General.
“We would advise that schemes wishing to engage in de-risking activity take note of back book activity as this should affect the timing of their approach to the market,” says Beard. “We expect that this element of the market may distract some of the buy-in providers at various points in the year. On a more positive note, some insurers will offer more attractive pricing opportunities if they have been left disappointed after missing out on attractive back books.”
