Investor groups that include private equity funds and other sources of “alternative capital” already control insurers that are responsible for about 5% of U.S. life insurance policy and annuity contract liabilities, according to Deep Banerjee.
If current trends continue, those investor groups could increase their share of the U.S. life market to about 10% in the next few years, Banerjee said today, in New York, at an insurance conference organized by S&P Global.
The S&P conference is important because S&P views of insurers affect how much the insurers pay for financing and how much they can charge for insurance.
“Alternative capital has flooded into the insurance sector,” Banerjee said during an introductory panel.
Banerjee, who is an S&P Global director, and conference speakers from outside S&P said, during the introductory session and other sessions, that they believe U.S. life insurers have done a good job of navigating through a low interest rate environment, maintaining high levels of capital, and controlling investment risk.
But S&P analysts and outside bond market analysts said they believe many of the big, publicly traded life insurers are trying to move away from selling low-margin, low-growth life insurance products, and toward either offering retirement services or pension risk transfer arrangements.
In a typical pension risk transfer arrangement, a life insurers sells a large group annuity to an employer that wants to shed a defined benefit pension plan.
A well-attended conference session on the pension risk transfer market featured senior executives from MetLife Inc., Principal Financial Group Inc. and Athene Holding Ltd.
Banerjee said he sees life insurers using deals with the alternative capital providers to move away from old product lines and into the pension risk transfer market.
One reason the volume of deals with alternative capital groups seems likely to increase is that the alternative capital groups seem to be considering a wider range of deal proposals, Banerjee said.
“Their risk tolerance seems to have changed,” Banerjee said.
The Pension Risk Transfer Opportunity
Sean Brennan, head of pension risk transfer at Athene USA, said at the pension risk transfer session that employers have a strong motivation to transfer pension responsibility to insurers.
The rules for pensions are complicated, the asset-management needs of pension plans are complicated, and “for every hour you’re spending on your pension problem, you’re not spending it on your core business,” Brennan said.
Wayne Daniel, head of U.S. pensions at MetLife, another pension risk transfer session panelist, said that he believes employers have transferred only about $200 billion of their $3 trillion in pension risk to insurers, and the employers will have to transfer most of that risk over the next two decades.
Employers transferred about $23 billion last year and might transfer about $20 billion or more this year, Daniel said.
One challenge the pension risk transfer panelists see is learning how to predict the behavior of “deferred, vested participants,” or participants who have left a company, have not yet started collecting benefits, but will have a legal right to collect benefits.
Another challenge the speakers see is the current process for shopping for, buying and setting up pension risk transfer arrangements.
“It’s a very slow, drawn-out process,” Brennan said.
Improvements in technology speed up the process, Brennan said.
Brennan said the ultimate challenge is making good on pension plans’ commitment to the participants.
“We don’t want to miss their checks,” Brennan said.
Most of the participants are retirees, and “for many of them, this is the vast majority of their income,” Brennan said.
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