Expert Q&A: the rapid evolution of the BPA market in 2024 and outlook for 2025

We recently caught up with Colin Haines, 4most’s new Head of BPA Market Services, to learn more about the evolution of the Bulk Purchase Annuities (BPA) market in 2024 and some of the key topics insurers should be aware of in 2025.

Q1: You recently shifted your focus from pensions to life insurance, what spurred this change?

The insurance industry has an extremely important role in providing pension plans to individuals and employers.  There is huge activity in the BPA market where insurers are taking over the responsibilities to provide pensions to members of company pension schemes. These are also known as buyouts, buy-ins, or pension risk transfers, and result in the pension funds passing over assets and liabilities to insurers as part of a single premium transaction.

This shift is resulting in the transfer of multi-billion-pound pools of financial capital from pension funds to insurers. It also means insurers need more resource to manage and administer all these BPA deals. There is plenty of financial capital available to write the deals, but there is a scarcity of human capital at insurers to keep up with the demand, and this is putting pressure on timelines to complete and onboard transactions.

This is an exciting time to be in the BPA industry. I am indeed one of many people who have made the move from pensions to life insurance. 4most’s goal is to help individual insurers write one more deal a month, so this is an ideal time to bring together 4most’s people and services and help insurers increase their deal volumes. 4most have an experienced team of specialists that already work with one-third of the BPA market, and who are perfectly placed to support other providers and other financial institutions.

As an actuary with 30 years’ experience in the pensions industry, I would say that the core skills needed to understand pension risks, manage pension teams, and advise on pensions are very similar in both the pension fund and life insurance BPA markets.  It has been great to join the 4most team, do work and go to client meetings together, and see some of the brilliant work on modelling, data, technology that they do for banks and insurers.

Q2: Can you give us an idea of the scale and activity of UK BPA insurers?

The UK BPA life insurance market is very buoyant.

• Over 250 deals with £40bn+ premiums were written in the 12 months to 30 June 2024. The outlook for this sector is positive, with £500bn+ deals expected in the next 10 years.
• 4most analysis shows that the 10 UK BPA providers have almost £2 trillion assets at end 2023 (including unit-linked and other non-BPA assets). This is a huge asset pool, with a huge amount invested in UK. And this is not just UK government bonds, but private assets too. When the government and pensions industry talk about pension megafunds, then we should not forget about the huge assets, scale, and influence of the UK insurers.
• The BPA insurers appear well capitalised with an average end 2023 solvency ratio of around 200%. But the range is wide: 150% to 300%. And the numbers without Matching Adjustments (MA) would look significantly worse – showing the importance of the MA to UK BPA providers.
• A number of BPA providers (as well as other insurers) also have significant Defined Contribution contract-based pensions and master trust businesses and will be included in the Government’s plans to consolidate and achieve scale in the Defined Contribution market.

Q3: Is there BPA activity in other countries?

Yes, and this is another reason I joined 4most, especially as I previously held a European leadership role working with global clients at a massive consulting firm.

Although the UK is arguably the busiest and most well-established BPA market, other BPA markets exist in Ireland, Netherlands, Nordics, USA, and Canada. I have personally been involved in deals in several markets over my career.

Along with the UK, 4most has offices in Dublin and Amsterdam where we work with local insurers and banks. Our client teams are also operating in the Nordics and working with some major Nordic financial institutions. I look forward to working with local colleagues and clients to expand capabilities into these markets too.

There is also BPA-related activity in Bermuda and Guernsey where reinsurers and captives are taking on some of the risk linked to BPA transactions, for example through Funded Reinsurance or Captive vehicles. This is also an area of interest to regulators and supervisors, as well as pension funds who enter transactions involving such counterparties.4most has client relationships in Bermuda and a good understanding of Bermuda regulations, and we are actively looking to expand our work in these parts of the BPA and Reinsurance markets.

In addition, there is also the potential for BPA transactions to occur in other geographies. In some markets the insurance pricing is not as competitive as we see in the UK, and this can make deals difficult – but in countries with lots of pension fund liabilities, there is scope to help insurers with pricing and products to meet potential demand.

Q4: Can you tell us a bit about the work 4most have been involved in within the market in the last couple of years?

In 2024, BPA insurers have had to deal with the PRA’s new Supervisory and Policy statements including: Matching Adjustment (MA), Funded Reinsurance; Credit Risk Internal Ratings; Calculation of Technical Provisions; Internal Model Requirements; as well as an update on the Treatment of Pension Scheme Risk. We have been working with a number of BPA insurers in the UK across many of these areas.

Our clients include FTSE 100, mutual privately owned insurers. We shape our solutions around the specific needs of the insurers we work with and put emphasis on understanding the priority areas so that the support we provide is targeted and effective.

Work delivered by 4most in 2024 includes:

• Supporting an insurer’s Internal Model team on various aspects of their modelling, including inflation calibrations, credit risk modelling, stress & scenario testing, and development of credit risk for Funded Reinsurance. We also transitioned some of their models to new software and supported on Proxy Model development and project delivery.
• Advising and supporting a new market entrant on MA optimisation and compliance.
• Full support on IFRS 17, capital stress testing, MA optimisation, and Analysis of Change reporting.
• Improvement of BPA reinsurance pricing models, Python reporting tools, review of Life actuarial software model code and process improvements.

We’ve carried out a range of surveys and market analysis.  Unlike in other European markets, widespread use is made of the Matching Adjustment (MA) in the UK, and this facilitates the writing of new business, especially for deferred annuities. 4most surveys show MA modelling approaches and amounts vary by insurers.

Q5: What is the outlook for 2025 looking like?

2025 will be busy for BPA providers and we are looking forward to providing resource and expertise to the BPA Market.

• 9 BPA provider groups will need to do Life Insurance Stress Test (LIST) work in the first half of the year –including adapting Internal Models, producing all the reporting, obtaining management signoffs, and preparing for new individual public disclosures.
• Insurers will need to analyse the impact of the PRA’s new liquidity rules which are expected to come into force at the end of 2025.
• The PRA and large global insurers will need to work through the IAIS’ new global Insurance Capital Standard (ICS) which aims to begin at the end of 2025.
• Insurers are wanting to improve and refine data, cashflow modelling and pricing processes, including process automation and design & selection of software and other tools.
• Given the high gilt yields and the implications for investments, we’ll continue to support insurers on capital management, asset allocation, Matching Adjustment (MA) optimisation and PRA MA applications.

Q6: How can 4most support insurers operating in the BPA market?

4most can help BPA providers with their pricing, reserving, models, data, and business transformation. Our experienced team of actuaries, credit analysts and data experts can join insurer project teams on extended contracts or as part of outsourcing arrangements.

BPA providers need good quality asset sourcing, and insurers are working hard to find the right assets for their MA portfolios including UK private investments. 4most is helping insurers with their asset allocation and capital optimisation models. The importance for private asset businesses to structure their propositions to be attractive to insurer investors (and indeed pension fund investors) cannot be underestimated.

Get in touch if you are interested in learning more about how we can support your organisation – info@4-most.co.uk.