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Competition heating up in the U.S. pension risk transfer market

Insurance Consulting and Technology|Investments|Retirement
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By Karen Grote | April 8, 2021

As insurers line up to vie for a share of the pension risk transfer market, those that can explore the margins should be in a strong competitive position.

As more defined benefit (DB) plan sponsors are willing to pass on the risks associated with accumulated pension fund liabilities, the U.S. pension risk transfer (PRT) market will continue to attract new insurance players. The last six years have seen 10 new market entrants, pushing the total number of companies competing for business to 18. As the pool of potential deals continues to grow, many insurers are looking to sharpen their competitive edge.

Even amid the temporary slowdown in the volume of deals in the second quarter of 2020, when the world focused on managing COVID-19 impacts, demand for the business was still so high that many insurers were willing to broaden their net of potential deal types. The result was an increase in the number of bidders for deals. And based on the evidence from the remainder of 2020 and to date in 2021, deals are returning to their steady upward trend (Figure 1).

Annuity purchase agreements grew from $3.8B in 2013 to $30B in 2019.
Annuity purchase transaction history

Source: Willis Towers Watson Pension Risk Transfer Survey; includes history for 16 insurance companies through December 31, 2019

Leading drivers of demand for PRT are plan sponsors’ costs that have steadily rose over the last decade and low long-term interest rates and volatility in equity markets that combined to destabilize funding requirements. Meanwhile, from the insurance side, it’s clear that more insurers are willing to take on larger, more complicated cases.

Opportunities around pricing sophistication

Despite the pandemic, PRT demand suggests that the heightened levels of competition are here to stay. So where will insurance companies find competitive advantage? Notably, in 2020, insurers improved key assumptions used to calculate deals, including expenses and future mortality improvement (FMI) assumptions.

To find out the prevailing market benchmarks, Willis Towers Watson conducted a survey in the third quarter of 2020 of insurance companies representing 95% of the PRT market between 2017 and 2019, asking them about their pricing practices and methodologies used in their most recent pricing exercises.

The survey results showed average acquisition cost (as a percentage of single premium) for deals among survey participants vary wildly by case size. The percentage of single premium acquisition expenses for in-pay life only larger sized deals (over $1 billion) was less than half than for smaller sized ($25 million) deals. The range was even wider for cases in which deferred lives were included. Similar patterns were observed in the assumed average aggregate maintenance costs (per participant) for the same populations.

On FMI, the majority of respondents said they use proprietary projection scales and project FMI in all years. But while FMI scales always vary by attained age, gender, and calendar year, only a limited number of respondents vary their FMI assumptions according to proportions of white- or blue-collar plan participants — a key area of deal characteristic differentiation. None of the respondents indicated that their FMI rates specifically varied by occupation, industry, or residency, although we note that collar could be viewed as a proxy for occupation and industry. Near-term FMI rates are a key area of uncertainty, with recent trends suggesting deeply suppressed FMI rates.

Greater use of reinsurance

Another potentially under-explored lever in pricing flexibility is reinsurance. To date, while some companies have used it successfully, we see gathering interest from PRT players. An active and growing reinsurance market that includes newer entrants that specialize in asset intensive product lines will help.

And with investment returns being such a key component of PRT earnings, access to the diversified asset strategies of reinsurers can be a key component in bolstering returns that may be hindered by the low interest rate environment.

Growing sophistication in current players and the addition of new players will continue to apply competitive pressure. As we close the first quarter of 2021 with an active PRT market, we anticipate competitors will continue to improve pricing and explore additional tools like reinsurance in their quest to grow their PRT business.

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Director, Insurance Consulting and Technology

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