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There’s a growing interest by U.S. plan sponsors in executing pension risk transfer (PRT) deals.
A briefing by A.M. Best says the uptick in PRT activity is driven by persistently low interest rates; plan sponsors’ desire to focus on core competencies and eliminate the risks associated with managing DB plans; strong equity markets; updated mortality tables that will significantly increase pension liabilities; and rising costs associated with managing plans.
Prudential, which currently manages the pension benefits of nearly two million participants at more than 5,700 companies, continued its dominance of the U.S. PRT market in 2014, despite increased competition from insurers.
Competition for mega-deals (more than US$1 billion) is increasing, as evidenced by Prudential accepting $3.1 billion of Motorola Solutions’ liabilities without receiving a premium, which typically amounts to 5% to 15% of the liabilities transferred.
Read: Motorola Solutions transfers pension risk
In addition to traditional life insurance carriers, reinsurers are interested in U.S. and U.K. longevity risk as capacity and competition increase in their traditional markets. Longevity risk also tends to be a natural hedge against the mortality and catastrophe risk reinsurers typically underwrite.
In some cases, reinsurers are joining to win business, as when Aviva reached a deal with a syndicate composed of Swiss Re, Munich Re and SCOR to reinsure £5 billion of liabilities.
Read: Pension plans consider de-risking
A.M. Best also notes that additional competitive pressures may come from asset managers and capital market participants such as investment banks, which currently advise many companies on PRT deals. Longevity risk appeals to investors because it is uncorrelated with most classes of invested assets.
The company expects demand for PRT deals in the United States to continue to increase in 2015 as maintaining corporate DB pension plans becomes more of a burden for sponsors.
Insurers looking to expand in this market must demonstrate strong enterprise risk management capabilities, solid risk-adjusted capitalization and a history of superior asset-liability management. Therefore, A.M. Best believes only a handful of life insurers have the capacity and scale to pursue mega-deals in excess of US$1 billion; however, there are numerous smaller deals coming to market that many insurers are capable of managing effectively.