• From a standing start in 2013, 60 transactions worth over £1billion have been transacted
• From 3% (2013), medically underwritten deals accounted for over 15% of transactions by mid-2015
• “Top-slicing” largest pensioner liabilities offers particularly cost-effective risk reduction
• Underwriting using some medical and lifestyle factors predicted to be adopted by most insurers in future
• Potential new entrants into the marketplace and the convergence between approaches will maintain competition in the marketplace
The report “The Good, the Bad and the Healthy: The medical underwriting revolution in the defined benefit de-risking market” suggests that as the sector develops those who currently operate in the MUBA space will begin to compete for more standard bulk annuities deals while “traditional” insurers will develop the ability to use some health and medical conditions to augment existing underwriting processes.
This convergence of approaches will be led by the appetite from employee benefit consultants and trustees who have reported MUBAs generating material savings of 5% – 10% of transaction price in some circumstances.
While the use of health and medical data in the retail space is long established, it is new in the bulk annuity market having first been used in any significant way in 2013. The report highlights the significant strides made since then with deal processes becoming more standardised, streamlined and responsive as parties become more experienced. This, in turn, has meant deals can be transacted quicker, enabling prepared schemes to take advantage of market opportunities.
Looking to the future, the report also suggests that the distinction between “traditional” underwriting and specialist medical underwriting may diminish as more insurers incorporate medical and lifestyle rating factors into their underwriting process and the specialist insurers compete in “vanilla” transactions.
The report highlights that top-slicing** transactions have the potential to remove a large amount of concentrated risk from a pension scheme, which medical underwriting can help achieve at a cost-effective price.
In addition, the report concludes that convergence in pricing approaches and the potential for new entrants into the bulk annuity marketplace means that pricing will remain affordable in future. This will fuel further growth in bulk annuity volumes.
Professor David Blake, Director of the Pensions Institute at Cass Business School, and one of the authors of the report, said: “Having originally looked at this market in 2013, “The Good, the Bad and the Healthy” allows us to revisit this fascinating sector to see just how far it has come. Growing from 3% of transactions under £100m to 15% by mid-2015 suggests that there is significant scope for further expansion, as we see a convergence between standard and medically underwritten approaches in the future. While this will not happen all at once, we accept that the clear distinction between sectors will not continue indefinitely and believe that medical underwriting is a process rather than a product. One that has enormous potential, provided additional financial and human capital is forthcoming.”
“With new entrants bringing the potential for the development of new underwriting processes – using new risk factors and data sources – which will complement the market’s existing experience, now is an exciting time to be involved in this field.”
Costas Yiasoumi, Director of Defined Benefit Solutions at Partnership, said:“Having pioneered medical underwriting in bulk annuities, we are delighted to sponsor this second Pension Institute report which clearly shows the growth and significant potential. Indeed, we are pleased to see that it has moved from being an approach for early movers to one that is increasingly being viewed as a mainstream approach for providing better value outcomes to pension schemes.
“Looking to the future, we welcome the continuing evolution and increasing usage of medical underwriting in bulk annuity pricing. The volume of medically underwritten bulk annuities written since 2013 is now approaching £1.5bn. That is a lot of pension risk secured by UK pension schemes with insurers, much of which would otherwise have remained stuck on pension scheme balance sheets. Medical underwriting has been a welcome contributor to the de-risking journey most UK pension schemes are on.”
|
