Risk settlement market to 'thrive' in 2021 as DB superfund market develops

The risk settlement market is expected to thrive in 2021, according to Aon, with further growth in appetite for small- and mid-sized transactions and the first defined benefit (DB) superfund transactions expected.

However, despite increased demand, the firm warned that "significant growth" will depend on the number of jumbo transactions taking place and the pace at which the market for commercial consolidation develops.

It also emphasised that whilst activity in the market in 2020 was defined by the need to manage the impact of the pandemic, the market has remained “remarkably resilient”.

For instance, it noted that there has been a number of “significant developments” in the market for commercial consolidation alongside this, such as the launch of the interim regulatory framework.

The firm also explained that whilst overall volumes in 2020 were lower than 2019, there was “massive growth” in the market for all but the largest transactions, with around a 50 per cent increase in the volume of transactions below £1bn in size.

Aon risk settlement partner, Mike Edwards, explained that, for smaller and mid-sized schemes, this was driven by the emergence of better streamlined transaction processes, making them more appealing to insurers.

He continued: “We saw attractive pricing over the whole year as insurers looked to fill the void in volume targets left by a lack of ‘mega-deals’.”

“Now in 2021, we anticipate strong appetite from insurers and reinsurers to grow the market further. We also expect there to be attractive opportunities for schemes of all sizes, with flexibility and nimbleness again being key themes.

“While many insurers continue to have the greatest appetite for billion pound-plus transactions, we expect that overall capacity in the market will be £30bn to £40bn, with a number of insurers looking to increase market share.

“However, overall volumes will, as always, be driven by the number of large transactions.”

In addition to this, the firm have also warned that this increased appetite could mean that schemes will need to work harder to stand out in the market going forward.

Aon risk settlement team principal consultant, Hannah Brinton, explained: "Due to the combination of a wider than ever range of structuring options being available to schemes and increased capacity and appetite from the reinsurance market, the dynamics are currently very attractive for schemes wishing to pursue longevity swaps.

“But reinsurers have finite pricing resources and they are increasingly having to select and prioritise transactions in much the same way as we’ve seen in the bulk annuity market.

“Now, more than ever, and to maximise reinsurer interest, schemes need to approach the reinsurance market with a clear strategy and objectives, as well as being thoroughly prepared from a data perspective.”

Aon have also predicted that the new year may also see the floodgates open for commercial consolidation, with "significant interest" in these options already seen from pension schemes in the second half of 2020.

“The bigger question is how successful the consolidators will be at achieving scale and how quickly this may happen," Aon risk settlement team principal consultant, Karen Gainsford, added.

She concluded: “A common theme in 2020 was of keen interest among pension schemes but a reluctance to be a first mover.

"Once the first deals occur and the concept is proven, it is entirely possible that we could see the floodgates open to superfund transactions in 2021.”

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