(July 9, 2012) — Life insurers in the United Kingdom are faced with the challenge of a mature market with scarce opportunity for large-scale growth, but green shoots are in sight.
Pension risk transfer deals are increasingly viewed as an area of opportunity within the insurance world. Such deals are expected to grow pension exposure from corporate schemes aiming to offload risks, according to Fitch Ratings.
The rating agency noted that the increase in pension transfers could be accelerated if Solvency II regulations – which compel insurance companies to match their liabilities with assets, while holding low-risk securities – is applied to pension schemes as it is likely to put further pressure on corporate funds to increase assets put into pensions.
“Pensions are an opportunity for growth for life insurance companies, in an industry that has seen net outflows every year for the last 10 years. The retail distribution reform, which bans insurers paying independent financial advisors a commission, is likely to trigger a further drop in sales in other savings products,” Fitch Ratings stated in a release.
A growing number of longevity swap deals are also being triggered by burgeoning pension deficits at UK companies as a result of low interest rates.
Examples of pension risk transfers on both sides of the Atlantic are numerous.
In the US in June, Prudential Financial agreed to take on $26 billion of the retirement liabilities of General Motors.
In January, Pilkington Superannuation Scheme, the pension plan of British glass manufacturer Pilkington, announced it had entered into a deal with insurer Legal & General (L&G) to swap out £1 billion of its longevity risk. This was the first longevity swap carried out by L&G, which has been one of the major players in the pension buyout sector. L&G agreed to insure only the longevity for those Pilkington scheme members already drawing their pension.
Meanwhile, Clara Hughes of Fitch Ratings told aiCIO that as pension risk transfers spike in popularity, insurers must be braced for the downside of credit risk.