Risk settlement market expected to gather pace in H2
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At an expected risk settlement volume of £25bn, this year is likely to be less spectacular than 2019 and 2020 due to the pandemic having put projects on hold; however, this also means there could be spare capacity next year, some believe.
In the first half of this year, risk settlement transactions totalled £20.4bn, made up of £7.7bn of bulk annuities and £12.7bn of longevity swaps, consulting firm Aon has found. Of those deals, 65% were under £100m.
Figures for H1 'understate what’s really going on’
However, it expects activity to pick up as funding levels are high and insurer pricing is still attractive, saying the outlook for 2022 partly depends on how quickly employers return to a normal operating environment, but spare capacity could mean next year’s volumes return to the heights of 2019 and 2020.
“What it’s showing is a quiet first half, which understates what’s really going on,” says Dominic Grimley a parter at Aon. “Everyone is frantically busy,” he says, but adds that the volume is partly constrained by the sheer lack of people capacity to quote on deals. On Thursday, insurer Aviva was the latest to announce a buy-in with the John Laing Pension Fund worth £320m.
While multi-billion full buyouts have not been seen in the past two years, there are potentially some billion-plus buyouts in the market that have not yet disclose, which could help to push next year’s volumes up, he opines.
Currently most deals are however being written for smaller sums, and Grimley says these are still getting through. “We’re not seeing anything we can’t place yet,” he says, but if capacity decreases, schemes may have to delay the start of the transaction.
Despite the credit spreads, he says pricing has held up as insurers have backed deals with more property-linked assets instead, such as mortgages.
Increased competition for full buyouts
More insurers are now quoting for full buyout, he observes. “We’ve seen Phoenix quote on... full scheme transactions, in particular substantial ones” and “we’ve seen Just [Group] as well being more confident quoting on full scheme transactions”, he says.
This means six of eight insurers in the market now quote on these, which Grimley describes as “a step forward”, attributing this to competitive pressure, as well as on an improved reinsurance market for deferred members. Source: Aon
Is ESG a topic?
With pension trustees’ minds having been focused on climate risk and ESG by regulatory requirements like implementation statements and Task Force on Climate-related Financial Disclosures reporting, ESG is also becoming a topic in insurer selection exercises.
Grimley says that insurers increasingly have ESG policies, with many having published such policies for the first time this year. “Gradually insurers are starting to have target dates for net zero for how they operate internally, or for their own assets. That is an emerging trend,” he says.
Aon's due diligence on insurers now includes ESG due to demand, he says: “It started, as always, with particular schemes asking the question but now we are doing it as standards.”
A further development is the focus in the market on residual risk, which has led to new practices such as an independent third party – usually a law firm – being appointed for use by all the insurers on a panel, to produce one report on residual risk for all parties.
What are you seeing in the risk settlement market?
