Published by Gavin Markham on
The sheer scale of the maturing defined benefit (DB) market, and schemes’ desire to de-risk, offers an attractive proposition for insurers looking to enter this market. However, a significant shorter term factor has been the impact of the ‘pension freedoms’ which were announced in the April 2014 Budget by the Chancellor of the Exchequer and came into force in April 2015. These changes have led to a dramatic drop in the sales of individual annuities.
This has resulted in the move of some providers of individual annuities into the bulk annuity market and has also been a key driver in the proposed merger of Just Retirement and Partnership, the specialist medically underwritten insurers.
Scottish Widows and LV= have recently been developing their capability and business propositions for entry into the market while Canada Life, who have been operating on a small scale for a while, are also looking to expand their offering.
Speculation about new entrants has been around for some time. However, there are significant barriers to entering bulk annuity market and it is important for insurers to get their preparation right. When the bulk annuity market expanded around 2007/2008, there were a number of organisations that attempted to enter with varying degrees of success. Insurers need to satisfy the Prudential Regulation Authority that they have a suitable business model along with sufficient expertise and capital to be able to enter this market. They will also need to have developed their pricing models and transaction processes, as well as implementing administration arrangements for any deals completed.
“For schemes and their sponsoring employers, the emergence of new entrants can only be a good thing – increasing competition and supporting innovation. However, it is a reasonably well-established market and generating a reputation as a reliable provider at an early stage will be fundamental for any new entrants. ”
Just Retirement and Partnership have been responsible for the vast majority of medically underwritten deals completed to date. The announcement of the proposed merger between the two insurers comes at a time when the underwritten market has shown strong growth since the first transaction in December 2012, with over £1bn of total business having been completed.
This rapid development has reflected some very competitive pricing achieved by schemes, demonstrated by a recent top-slicing transaction advised by Barnett Waddingham.
The position following the merger is uncertain at this stage. In the short term the removal of direct competition between the two leading providers could tend to push pricing up relative to the extremely attractive terms which have been available.
However, we would expect medical underwriting to continue to provide an attractive option for schemes. In particular, the merged business will want to maintain a pricing edge relative to traditional providers and further the development of the market, especially as the growth of the DB business is a major stated aim of the merger. In addition, specialist new entrants and traditional insurers using medical information can help to support a competitive underwritten market.
Therefore, we would anticipate the continued growth of medically underwritten transactions, and the increased financial strength of a merged provider may well be good news for schemes.