LONDON (16 May 2016) – Aon Hewitt, the global talent, retirement and health solutions business of Aon plc (NYSE:AON), has said in its Risk Settlement Market 2016 report that this year will see another record total of bulk annuity and longevity swap deals.
The risk settlement market continued to grow during 2015 with total transactions exceeding £30bn compared with £22bn in 2014. Aon believes that this trend will continue in 2016 as new market entrants and existing providers will create greater capacity to offer competitive solutions for schemes of all sizes.
Martin Bird, senior partner and head of the Risk Settlement Group at Aon Hewitt, said:
“We are confident that 2016 will again be a bumper year for the risk settlement market. While there was a sluggish start to the year mainly due to the introduction of Solvency II — with providers bedding down their internal modelling and working through its impact on settlement pricing — we believe that the new regulatory framework will continue to drive innovation as providers strive to remain competitive.
“Volatility in stock markets in 2015 and continued low yields posed challenges to funding levels but we believe that once market conditions improve, pension schemes will start de-risking and there will be a market of
£20 billion or more required for bulk annuity transactions alone. Financial conditions aside, there remains a strong focus on pension de-risking and this drives the need for solutions that bridge the affordability gap.”
In 2015 the market saw an increased focus on innovation. Longevity swap providers introduced a variety of structures to facilitate cost effective risk transfer and started to offer hedging solutions to more than just the big schemes. Meanwhile, bulk annuity providers also developed innovative products and broking services for schemes of all shapes and sizes.
The settlement market headlines have traditionally been dominated by transactions from large schemes and while there has always been a regular flow of smaller scale transactions, the challenge has been to efficiently engage insurer interest. This challenge is addressed by a combination of better preparation by schemes and a more thoughtful approach to market, and by insurers developing their offerings to provide compelling risk settlement solutions for smaller schemes. In this regard, the learnings from the larger transactions are now trickling down to the smaller schemes and innovative ideas are becoming more widely accessible.
Martin Bird continued:
“If there is a message which I can never stress enough, it’s that individual pension schemes - whatever their size or ultimate goal, or whether their aim it is to annuitise externally or to be self-sufficient - should get their house in order so they are ready to capture derisking opportunities when they arise. Market opportunities can come and go quickly, so it is essential to be prepared with clean data when the right conditions appear.”
The global settlement market
Risk settlement is at different stages globally but continues to evolve. The US, Canada and the UK markets are at a more advanced stage.
In Canada, for example, there was a threefold increase in the amount of liability settled in 2015 compared to 2014, with almost $7.5bn of assets being transferred to insurers. Continental Europe is at the other end of the spectrum and the market is still to take off. Differences between life expectancies assumed by insurers and reinsurers and those assumed by pension funds are the main reason for the low activity but there have been a number of deals already announced in the Netherlands.
Martin Bird commented:
“The market in Continental Europe continues to be a case of ‘watch this space’ but the ingredients for growth are already present and a closer alignment of insurer and pension plan longevity views could cause a quick uptake in the market, just as we saw in the early days of the UK market.”
Further highlights from the Aon Risk Settlement Market 2016 report include:
• 2015 was a good year for the risk settlement market and Aon Hewitt also benefited from great success in the and traditional bulk annuity markets, thanks to its platforms AHEAD (a platform collecting medical data for quotations) and Pathway (streamlined bulk annuity services).
• The last quarter of 2015 was characterised by an unusual number of full scheme buyouts as sponsors anticipated higher prices after the introduction of Solvency II.
• In 2015, medically underwritten annuities represented 12% of the bulk annuity market volume, up from 5% in 2014.
• Clean data remains vital for clarifying the extent of a scheme’s risk exposure.
• Longevity reinsurance might become a trend as few annuity providers are expected to bear all the risk created by increased capacity themselves.
Notes to Editors
Aon plc (NYSE:AON) is a leading global provider of risk management, insurance brokerage and reinsurance brokerage, and human resources solutions and outsourcing services. Through its more than 72,000 colleagues worldwide, Aon unites to empower results for clients in over 120 countries via innovative risk and people solutions. For further information on our capabilities and to learn how we empower results for clients, please visit: http://aon.mediaroom.com.
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