LONDON--(BUSINESS WIRE)--Institutional investors, including life insurers and pension funds, seeking to participate in the U.K. Government’s recently announced secondary annuity market must consider any pricing challenges and potential exposures to credit risk. They should also take into consideration stringent standards when dealing with targeted sellers to avoid any future allegations of mis-selling.
On March 18, 2015, H.M. Treasury announced a consultation as part of the 2015 Budget, aiming to provide flexibility to pensioners who have already been forced to buy an annuity. In a new Best’s Briefing, titled, “A.M. Best Comments on Annuity Changes’ Impact on U.K. Life Insurers," A.M. Best states that the government has estimated five million people have annuities, which is a significant number. However, in many cases, small sums are involved and the proposed changes are not aimed at unwinding these contracts, but simply re-assigning payments to third parties.
Under the current proposals, life annuity writers would not be allowed to buy-back and unwind their own policies. Carlos Wong-Fupuy, senior director, analytics, said: "Potential buyers may involve existing insurance companies, pension funds, or even new start-up companies aiming at buying and re-packaging individual annuities that can be re-sold as a block. The obvious potential players in the market are those which understand the risks involved in the business, such as life insurers and pension companies."
Consumer protection is expected to be a crucial consideration, especially given the disparity in negotiating power and information available between the average annuitant and a potential buyer. The Financial Conduct Authority will be particularly concerned about avoiding any potential "mis-buying" scandal, especially if there is strong market demand with the potential for adverse selection. Yvette Essen, director, industry research, Europe & Emerging Markets, added: "H.M. Treasury has clearly stated that for the 'great majority' of customers, selling an annuity will not be the right decision. A.M. Best considers the risk is that those most likely to sell their annuities are probably the most vulnerable, and as financial advice often comes at a price, consumer support and fair treatment will be critical."
Market conditions will play a key role in the success of a secondary annuity market. However, A.M. Best doubts any existing company will seek to obtain a large position in capturing this new business, and consequently, does not anticipate taking any rating actions for U.K. life insurers in response to the budget proposals.
To access a complimentary copy of this briefing, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=234950.
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