(May 13, 2013) — 2012 was the year of the major derisking deals on both sides of the Atlantic — General Motors, Verizon and the UK’s Merchant Navy pension fund to name but three — but 2013 and 2014 could witness the advent of a new type of derisking deal.
Last year, the UK saw the advent of medical underwriting techniques into the buy-in market through annuity specialists Partnership and Just Retirement.
This methodology takes the health circumstances of a tranche of pensioners into account, based on doctors’ records, member questionnaires and interviews with the members.
Insurers consider the health situation of the group of members to create a more accurate premium, thereby potentially reducing the cost if, for example, you have a high number of smokers, or members with heart conditions.
Due to the in-depth nature of the methodology, the medically underwritten buy-ins can currently only be performed for small groups of pensioners — usually under 300 lives — but the introduction of large insurers Aviva and Legal & General into this space in the past few months has raised the question of where this market will develop.
Consulting firm LCP reported on the phenomenon in its annual buy-in, buyout and longevity swap report, released today.
Ken Hardman, partner at the firm, said: “Trustees need to balance the potential savings from medical underwriting against the risk that the membership is in better health, so leading to a higher buy-in price.
“Early assessment of feasibility can help weigh up the pros and cons to make an informed decision of whether to go down the medical underwriting route.”
Will Hale, director of corporate partnerships at specialist firm Partnership, told aiCIO that just six of these transactions have taken place so far, with the smallest amount of liabilities transferred totalling £3.2 million.
“We’re really close to completing another £5 million deal, and there’s a good pipeline of prospects approaching the £30 million level,” Hale said.
“I believe Aviva and Legal & General are looking at incorporating individual underwriting into their bulk deals.”
Some in the industry have issued concerns about whether the introduction of more in-depth, accurate underwriting would increase the price of regular bulk annuity deals.
The argument goes that insurers will expect all impaired annuity candidates to be moved into one of these medical underwritten buy-ins in future, therefore making the rest of the pensioner pool healthier and more expensive to insure.
But Hale dismissed the suggestion, saying the volume of medical underwriting annuities was unlikely to have that big an effect on insurers’ regular bulk annuity premiums.
The LCP report also detailed an overview of how pension plan derisking differs around the world:
1) In the US, $36.5 billion of pension liabilities was transferred to insurers as a result of the General Motors $29 billion partial buyout and Verizon Communications’ $7.5 billion partial buyout. LCP predicts the ongoing legal wrangles with Verizon’s beneficiaries (who are challenging the deal in court on the grounds that Verizon failed in its fiduciary duty) will put a temporary stop on new deals, but that this could refocus the pension market on buy-ins.
2) In Ireland, buyout activity has been driven by the smaller end of the market after the closure and wind-up of a large number of small DB plans. Further activity is expected in 2013 after MetLife completed a £90 million deal early last year and Legal & General writing its first transaction this year.
3) And in the Netherlands, pension funds are still keen on buyouts – the fact they have to maintain funding ratios in excess of 100% sponsors are relied on less to hand out large lump sums to help complete a buyout process. However, Dutch insurers are less keen – there are signs that some of the key insurance players are losing their appetite for buyouts as they seek to preserve capital and generate higher profit margins.
LCP reports this is encouraging external insurance companies to consider entering the Dutch market, bringing some welcome competition and additional capacity.