Surge in bulk annuity demand prompts insurer capacity crunch concerns

Bulk annuity insurers are currently reporting the “strongest pipeline of annuity auctions for some years” and pension schemes may need to compete harder amid insurer capacity concerns, according to Aon’s latest UK Risk Settlement Bulletin.

The update suggested that, in line with previous years, the majority of the bulk annuity annual volume will complete in the second half of the year.

This demand, according to the consultancy, is partially a result of the recent rise in yields, which reduced scheme liability values and made it necessary for insurers to pursue more deals to write a given target level of business as a pound amount.

Aon noted that this may in turn prevent 2022 from being a record year for transactions, suggesting that £35bn, the average annual bulk annuity market size over the past three years, may be a more realistic target than the near £44bn peak recorded in 2019.

Despite this, the firm noted that, for some sponsors, the fall in pension liabilities in pound terms may also bring the buyout deficit “within cheque-writing distance”, meaning that many schemes are now closer to their endgame.

Indeed, Aon suggested that demand in the bulk annuity market is being driven by improved funding levels for many schemes and attractive annuity pricing, with more insurers competing for full scheme buyout transactions in particular.

However, the update also raised concerns over the extent to which insurers will be able to meet the increased demand, raising particular concerns over the constraints stemming from people capacity.

The consultancy explained that although there has been "significant recruitment" in this area from some insurers and reinsurers, pricing teams remain stretched, meaning that insurers have not been able to keep up with current levels of demand.

This has caused insurers to be increasingly selective on which transactions they will quote on in the short-term, according to Aon, with an increased focus on schemes of all sizes carrying out thorough preparation ahead of approaching the market.

In light of this, and in the current market climate, Aon warned that schemes are having to compete harder for insurer engagement and potentially show flexibility over their auction timing and form.

It stated: “Schemes with fixed requirements around transaction timings will be reliant on insurers having the capacity to fit around this.

"Schemes that have more flexibility around transaction timing are better positioned to take advantage of insurer capacity – giving insurers a longer window to produce a quotation allows the insurer to resource the transaction around other auction processes and utilise pockets of capacity that crop up.

“Whilst flexibility is important for all transaction sizes, it’s a particular advantage for smaller transactions, given their size means insurers can more readily utilise short-term capacity to price these deals (compared to larger transactions that take more structuring and resource) – especially if they are being run via a streamlined broking process.”

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