Expert speakers from across the industry
The speakers' expertise across the sector provided a holistic view of the current status, and outlook for the most important products in the UK life insurance sector. Specifically, speakers' current roles include head of new business, heads of BPA business, specialist de-risking consultant and independent trustee.
Our key takeaways:
'More records to be broken next year' for industry volumes and transaction sizes
2023 is set to be a record year with c. £50bn of volumes to be written (2022: £28bn, previous record 2019: £45bn). The outlook from here remains constructive, with volume records to be broken again next year, and reaching £70bn pa from 2025. As discussed at the seminar, there are a number of large transactions expected to be approaching the market next year.
Margins attractive as insurers more selective on opportunities
The returns available to insurers tend to increase in years when market volumes are higher, as insurers take advantage of supply / demand imbalances. Given the expectation for record volumes going forward, the outlook for margins is positive. This is in line with our recent note, BPA margin analysis that provides evidence on the increasing pricing power, which suggested that insurers have already started being more disciplined in their approach to BPA pricing.
Bulk annuities remain the 'gold standard' for pension schemes
Despite the increasing options for trustees of pension schemes, transferring the benefits to an insurer remains the preferred outcome, with the security provided by an insurer being the 'gold standard' of the outcomes available to members. Alternatives include:
- 'Running on' which requires schemes to re-risk the asset portfolios and this has been spurred on by the recent government ambitions to utilise DB assets to fund 'productive finance' in the UK economy.
- Commercial consolidators, i.e. superfunds.
- Third party capital solutions to support transition to better funding.
Demand for longevity risk supportive for the market
The majority of new business longevity risk is reinsured, and reinsurers remain very willing to accept this risk. Pricing has changed dramatically in the last 18 months, and longevity reinsurance is as cheap as it has ever been — a positive for overall bulk annuity pricing. This reflects reinsurer views that life expectancy improvements will not be as high as previously expected, potentially as they adjust for COVID-19.
Recall that we forecast material longevity reserve releases for the UK life sector, that are not in consensus. The long-term outlook for the impact of obesity medicines such as GLP-1s on life expectancy is uncertain as it depends on the adoption of the drugs by the NHS, however in the short-term there will likely be no impact.
'Mini-industry' developing for addressing pension scheme illiquids
Illiquid assets add complications to bulk annuity transactions, with many large schemes that are now approaching the market having billions of £s of these assets. Insurers are therefore developing innovative solutions to address the inability to sell these assets without taking material (20%+) haircuts. In particular, insurers are exploring their ability to restructure the assets to make them Solvency II compatible, which should be aided by Solvency II reform.
