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U.S. pension risk transfer: Growing and evolving

By Karen Grote | November 3, 2022

Over the past four years, the pension risk transfer market has grown; as more insurers enter the market and existing players try to capture market share, pricing approaches have evolved.
Insurance Consulting and Technology|Investments|Retirement
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Amid rising economic uncertainty, higher interest rates and inflation, the U.S. pension risk transfer (PRT) market has returned to pre-pandemic annual growth rates. More insurers have entered the market, and others are willing to take on larger or more complex risks. The added competition is leading insurers to adapt and evolve. As the competitive pressure mounts, insurers continuously seek ways to improve and refine their pricing to capture market share. Our 2022 PRT pricing survey provides insights into how the market and insurers have changed over the past four years.

A return to market growth

While corporate plan sponsors abruptly pulled back from the PRT market in early 2020 due to high levels of uncertainty associated with the onset of the COVID-19 pandemic, the pullback was short lived. Insurer interest in PRT, in contrast, did not wane at the start of the pandemic. As a result, insurers were ready when plan sponsors quickly returned to the market later in 2020. The result was only a small downturn in the amount of liabilities transferred that year.

Since then, two key factors have driven the PRT market:

  • The increasing difficulty and expense of managing defined benefit pension liabilities
  • Improved funding levels as a result of higher interest rates

Amid this backdrop, plan sponsors have increasingly sought to transfer the risks associated with accumulated pension fund liabilities to insurers.

As a result, 2021 saw a return to pre-COVID-19 market growth rates. It was the strongest year in the market since 2012; however, we expect that record will be short lived. The results from first half of 2022 are pointing to a possible new record, knowing that most of a year’s deals typically occur in the second half, and especially given IBM’s recent $16 billion transfer.

Refining mortality

Insurers’ approaches to mortality assumption setting are growing in sophistication. In 2017, less than half of survey respondents made modifications to their mortality tables to account for experience. As of 2021, all survey respondents modified their mortality tables based on experience data.

Additionally, the use of predictive analytics increased. Today, roughly half of respondents use predictive analytics, compared with approximately a third of respondents in 2017.

Insurer use of variables increased too. Most notably, they sharply increased their use of ZIP codes in mortality assumption rates. The vast majority of respondents now use ZIP codes, which rank as the second most used mortality variable. In contrast, ZIP codes were the second least used mortality table variable in 2017.

COVID-19 ultimately had little pricing impact

The economic impacts of the COVID-19 pandemic appear to have had very little effect on the PRT market. As previously noted, transactions saw a brief drop at the start of the pandemic in 2020 but quickly rebounded and continued their growth. With that backdrop, we asked respondents how COVID-19 affected their pricing strategies.

Most respondents did not make any changes to their:

  • Baseline mortality assumptions
  • Interest rate scenarios
  • Investment strategies

And no respondents made changes to their profit targets.

However, most respondents included additional mortality sensitivities, although the adjustments to mortality made for the sensitivities varied widely. A slight majority of respondents excluded or plan to exclude historical mortality experience from 2020 and 2021 in analysis for assumption setting.

Into the unknown

Deferred lives add complexity in a deal because of unknown participant behavior. Unlike retirees or beneficiaries already receiving a fixed payment, deferred pension participants have several elections to make regarding the timing and nature of their eventual pension income.

In the past, the uncertainty and the chance of misstating benefits in the valuation for a bid price made some insurers fearful of transactions involving deferred lives. Today, most of the major players take part in bidding on deals that include deferred lives. As a result, insurers are growing more interested in deferred life assumption setting.

For benefit commencement age, most are using a range of ages depending on deferred life types (active, current term vested, future term vested and beneficiaries), although the ages used varied across the participants. More consistency was seen in the assumption for earliest age, with about half using the earliest eligibility age. For the latest age, responses ranged from normal retirement age up to an attained age of 72.

Regarding deferred life mortality, most are reflecting different mortality assumptions before benefit commencement versus after.

What’s next in the PRT market

The U.S. PRT reinsurance market barely existed before 2017. While the number of completed reinsurance transactions is still relatively small, interest is growing and could change the PRT market. Reinsurers could help:

  • Improve pricing via diversified asset strategies
  • Increase deal capacity and risk diversification
  • Offer an alternative view of longevity risk or asset diversification

Most insurers do not currently use reinsurance, with less than a quarter of survey respondents indicating they use reinsurance (internal or third party) even occasionally. Only one respondent regularly uses reinsurance. Yet reinsurer interest in the PRT market is growing.

Increasing sophistication in current PRT players and the addition of new players (both insurers and reinsurers) will continue to apply competitive pressure. As we look to the future of PRT, we expect competitors will continue to improve pricing and explore additional tools such as reinsurance in their efforts to grow their PRT business.

This article provides a sample of key findings of the surveys. We relied on the information as provided by respondents with limited review. We make no representation regarding the accuracy of the information as summarized in the survey results and assume no responsibility for any erroneous information.

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Senior Director, Insurance Consulting and Technology

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