Making progress

Greg Wenzerul reveals how the buy-in process could be improved

The buy-in market, like many others, continues to evolve and develop. The last five years have seen some encouraging efforts from insurers, brokers and schemes to try and create a more optimal and efficient process leading to successful transactions. In the heat of getting deals over the line it can be forgotten that all parties involved are working towards the same aim - an efficient and transparent market that is transaction focused.

As an insurer, Prudential is particularly pleased with the advancements made by the brokers and the schemes that continue to approach us. As the market develops so to do the behaviours we are witnessing, which we hope will filter through to the whole market. But we also believe there is room for further improvement still and this has been highlighted below.

Through visibility of transactions in the market, experience and close links to insurers, consultants are increasingly providing schemes with more accurate indicative affordability estimates at little cost (to the scheme) before engaging insurers. This has equipped schemes with valuable information to aid them in internal affordability and commercial discussions.

This process has also led to less ‘wastage’ from an insurer’s point of view as accurate indications can be used for early discussions prior to obtaining ‘transactable prices’, which often involves a lengthy process. When schemes decide to press ahead, Brokers can add real value to shape and sharpen the final stages of a transaction. This not only reduces the fees a scheme pays but also saves the insurer’s time, while also helping enhance the broker’s profile in this specialist marketplace.

It is worth clarifying that many processes initially involve insurers pricing a number of tranches, which can be desirable if a scheme is considering a partial buy-in and wants to optimise the population in question. This is useful as it helps compare different insurers’ competitiveness under differing circumstances, i.e. age or benefit type. Insurers have different ‘sweet-spots’ so it may not be clear which provider or tranche is most optimal. It is in this area where we see room for improvement for brokers. Firms that can accurately provide and explain the difference between two or more tranches to a scheme would have an enormous competitive advantage, especially those who understand risk adjusted measures and economic value. It is important to note that the differences arise not only from the immediate change to a scheme’s Technical Provisions but also to any future changes as the populations run off. Therefore it is important to understand the actual underlying risk that is removed as part of the transaction.

Although there is no single ‘right’ way to run a process, we have seen that some methods, which may have been designed to help a scheme, can in practice be harmful to the transaction’s success. Clichéd as it is, continuous review of processes and their appropriateness for specific client circumstances is essential. An example of false economy is when a broker works for weeks to reduce an insurer’s price, only to find that the market moves adversely, increasing the effective price for the scheme and wiping out any real advantage thus placing the client in a worse position.

An important point for brokers to consider is the length of an exclusivity agreement, as insurers’ pricing changes with market conditions so the best insurer one month may not be the best a few months later. Experienced brokers will be able to use their knowledge of the market and insurers’ pricing methodologies to find an agreeable price, followed by a swift and efficient transaction.

The market will continue to improve and the result will be more efficient transactions, and better outcomes for both insurers and schemes. We see further developments that will achieve and optimise ‘best pricing’ as a real driver to increase the volume of transactions over the forthcoming 18 months.

Written by Greg Wenzerul, head of defined benefit solutions, Prudential

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