Six ways Solvency II has affected the pricing for pensions insurance

Six ways Solvency II has affected the pricing

Solvency II finally went ‘live’ on 1 January 2016. Four months in, what have we learned ?

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  1. Pricing for pensioners has stayed broadly the same
    The impact on pricing for pensioner liabilities has been broadly neutral (as expected).
  2. The biggest impact has been on pricing for deferred liabilities
    Pricing for members who are yet to retire has typically increased as expected by 3% to 6% (but we’ve seen figures outside that range as well).
  3. Efficient investment strategies continue to work well in a Solvency II world
    Sourcing appropriate (i.e. long-term, cashflow matching) assets can make a very big difference to price (double digit percentages) – easily big enough to offset the increase due to Solvency II. Without such assets, insuring deferred liabilities is close to unaffordable.
  4. Increased credit spreads have improved pricing
    Since Solvency II came in at the start of the year, credit spreads on corporate bonds have widened compared to swap yields – improving pricing by around 1.5% or more. This has helped to bring down insurance pricing, further offsetting the impact of Solvency II.
  5. Scheme factors are more important than ever
    Solvency II, insuring transfer value and commutation terms which are better than the insurer’s own cost neutral terms can increase pricing by 20% to 30%. More than ever, pension schemes need to consider early and carefully the level of factors to insure.
  6. Reinsurer capacity for longevity risk is being tested
    Solvency II increases insurers’ appetite to reinsure longevity risk. In general, reinsurers prefer to deal with insurers than with pensions schemes doing longevity swaps. As a result, this increased appetite from insurers is therefore reducing resource available for longevity swaps.
    In summary, Solvency II has had (and will continue to have) an impact. However, widening credit spreads, more efficient investment strategies and new insurers coming to the bulk annuity market, means that pricing for pension scheme buy-ins and buy-outs is as competitive as ever.

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