14 November 2013

Risk.net: UK insurers dismiss risk of bulk annuity capacity crunch

A surge in demand from UK pension schemes for bulk annuity deals will not overwhelm existing supply in 2014, but could prompt an influx of new capital and new competitors in the buy-in/buy-out market, say insurers.

Firms active in the bulk annuity market, while convinced they have enough spare capacity to accommodate the boost in demand, are not ruling out the possibility that new players will enter the market.

Tom Ground, head of Legal & General's bulk annuity and longevity insurance de-risking business in London, says: "Last quarter was very busy. Pensions Insurance Corporation (Pic), Rothesay Life and ourselves all closed £1 billion-plus deals. It will be interesting to see whether there are new entrants and innovations on the back of this activity."

But some argue that barriers to entry remain high, making it difficult for new insurers to make an impact. Deals require capital, sophisticated operational and asset management infrastructures, and depend on the level of confidence a pension scheme has in a provider – something that tips the market in favour of established institutions, according to Jay Shah, co-head of business origination at Pic in London.

The recent surge in interest in buy-ins and buy-outs from pensions schemes has prompted warnings that insurers may not be able cope with demand.

Charlie Finch, London-based partner at Lane, Clark & Peacock, explains: "Appetite is high with a number of large pension plans looking at transactions and, if all of those move forward in 2014, then we think there could be a capacity crunch in Q4 2014. Indeed, it could be the first year where demand from pension plans exceeds supply from the insurance companies."

Firms say this concern is overblown, however. Pic's Shah believes there is enough spare capacity in the market to accommodate up to three times what was written in 2013.

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