The UK’s pensions danger switch (PRT) market is without doubt one of the strongest development alternatives in European insurance coverage, in line with JP Morgan.
A brand new report from the monetary big states that whereas there are excessive obstacles for brand spanking new entrants, there’s at lest a £600m development alternative over the following ten years.
This, write the authors, is because of what it calls the ‘onerous nature and volatility’ of outlined profit schemes, alongside enhancing funding ranges and work from insurers in offering options.
Across the obstacles to entry, the authors wrote, “4 insurers wrote 80% of PRT volumes prior to now 15-20 years: two listed – Aviva and Authorized & Common; and two unlisted – PIC and Rothesay. The obstacles to entry on this market are excessive (regulatory, capital, experience, belief) resulting in an extended j-curve to ascertain a presence and excessive margins. We estimate a 14-15% IRR on PRT offers and see a small danger of elevated competitors. Insurers with in-house asset capabilities to originate long-duration illiquid belongings to again these liabilities have a aggressive benefit.”
They added: “There are >£2trn of outlined profit pension scheme liabilities sitting on the stability sheets of UK corporates in the present day. These present outlined pension advantages to workers, based mostly on years of service, and have been seen as a sexy a part of a typical advantages package deal within the Eighties-Nineteen Nineties. Nevertheless, low bond yields, unstable markets and accounting rule modifications have meant these schemes have change into considerably underfunded (~75%) and have change into a burden for many corporates.”
They went on: “We consider there’s big pent-up demand from corporates to cross these liabilities on to insurers or to de-risk – creating a considerable development alternative for UK life insurers targeted on this phase.”
The chance of PRT offers inside the UK market has been an more and more widespread subject on these pages in recent times.
In February, Fitch Scores wrote in a be aware that the UK life insurance coverage sector was the one one with an enhancing outlook inside Europe as a result of growing variety of pension schemes trying to switch dangers. Again then, Fitch estimated that UK life sector purchase ins and purchase outs numbered 28 in 2021, barely down from 32 the 12 months earlier than. Nevertheless, it forecasts that this may rise to 40 and 50 this 12 months and in 2023.
Fitch Scores stated: “Volumes of buy-ins and buy-outs declined in 2020 and 2021, which we attribute to the detrimental impression of pandemic-induced monetary market volatility in 2020 on funding ranges and confidence to transact. The transaction timeframe, from initiation to conclusion, is usually 9 to 12 months.”
It has been no secret lately that pension danger transfers have been on the rise within the US and UK, with L&G predicting this week that the second half of 2021 was notably robust for this sector. Within the US, the corporate recorded an estimated $38-40bn (£28-30bn) in whole annual transaction quantity, which far surpasses the $27bn reached in 2020.
Additionally in February, Authorized & Common stated that the worldwide PRT market was to have a powerful H2 2022, notably within the US the place potential transaction quantity information have been being set.
L&G’s World PRT Monitor reported a powerful second half of 2021 for each the UK and US markets as demand for PRT options continued to develop, helped by competitively priced reinsurance capability. Within the UK, the Monitor reported that the second half of the 12 months was one of many largest and busiest six-month intervals within the historical past of the market, with round £22bn of retirement revenue secured.
Total, it estimated the overall transaction quantity for the 12 months approached £30bn, with rising demand pushed by numerous components, together with improved pension scheme funding ranges and aggressive longevity reinsurance pricing.