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The BPA Market – the Wonder Woman of the Life Sector?

Published by Kim Durniat on

The bulk purchase annuity (BPA) market had its most successful year in 2014 where it broke records on several fronts – overall volume, largest individual deal, and largest medically underwritten deals. Despite 2015 looking unlikely to match these same highs, the market is still thriving and gaining more momentum as months go on. With individual annuity sales falling drastically post the 2014 budget the competition for BPA business is fierce as the multi-line insurers compete to make up the shortfall. With such great potential for growth, with schemes worth over £2bn sitting unwanted on the balance sheet of corporate entities, you have to ask ‘if you are not in, why not?’

The market

The playing field has seen leavers and joiners aplenty over the last few years. The market has been pushed forward by new entrants competing with the large, well-established insurers and innovation has been seen with the entrance of the medical underwriters and various innovative pricing mechanics. This has resulted in a good competitive market for firms to battle it out in.

Growth has been great with written premiums reaching £13bn in 2014; a welcome replacement of lost individual annuity sales for the many firms who write both.

“The market has been pushed forward by new entrants competing with the large, well-established insurers and innovation has been seen with the entrance of the medical underwriters and various innovative pricing mechanics. ”

Different business models

Historically the ownership, transaction preference, investment and reinsurance strategy (all areas which have seen a lot of scrutiny from trustees) of main players have looked quite different. However, we are seeing more convergence and the lines are becoming more blurred.

For example, several insurers made firm public announcements as to the size of schemes they would target, but have opened themselves up to a wider range after losing individual annuity sales and needing another outlet for their earmarked capital. Investment strategies in the past have looked quite different – ranging from a tried-and-tested reliance on secure bonds, to exotic strategies making use of covered bonds and extensive derivatives -  but now more firms are investing in loans and equity release going forward to get the much needed yield to price competitively.

A pension consultant’s view on the new business process

The trustees of pension schemes will always focus primarily on price. However, other influences do matter, including; policy terms, deal structure, and benefit security. Ensuring the best price is obtained requires schemes to have high quality data, an excellent governance structure, and time a transaction for when there is competition between insurers in the market.

“New entrants, on the other hand, face the challenge of trying to make a name for themselves against those who are experienced, well-known to trustees, and who have likely already transacted in the market.”

The challenges

We took the view of looking forward to see what challenges may be affecting those already in the market and those looking to enter. Existing firms in the market will be focussing on Solvency II and its requirements, particularly matching adjustment approval on the less pedestrian investment strategies. Competition and the risk of a dearth of appropriate assets and reinsurance are other areas highlighted as challenges for the existing players.

New entrants, on the other hand, face the challenge of trying to make a name for themselves against those who are experienced, well-known to trustees, and who have likely already transacted in the market. As this is a very niche area which requires an understanding of the nuances of DB pensions as well as experience in the life market; so creating the team with the right skills, models and experience is key.

Conclusion

So, you are probably wondering why we think the BPA market is like wonder women? We think that both are strong, dynamic, glamorous and inspiring. Both face new challenges (often every week!) but both have the resilience and ability to overcome them all and continue to go from strength-to-strength.  

Kim Durniat and Gavin Markham presented at the IFoA’s Life Conference on the topic of the Wonder Woman of the life sector, the Bulk Purchase Annuity (BPA) market. The BPA market is currently one of the most dynamic areas of the life sector, with records being broken every few months, and it acts as a great opportunity to unite the life and pensions practice areas.

Lloyd Richards contributed to the writing of this post.

About the author

  • Kim Durniat

    Head of Life Consulting, Kim is responsible for managing the Life team, ensuring high quality, great value advice that meets client’s needs and developing our service offerings to the Life insurance sector.

    View Biography

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