Waheeda Narker: ‘There is a limited universe of public and private assets’
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The government’s desire to leverage the reforms of Solvency II in the UK to boost long-term investments is well publicised. But how easy is it to materialise this commitment?
It appears that opportunities are limited, according to Waheeda Narker, retirement and decumulation segment lead for WTW’s insurance consulting and technology business.
In addition, insurers also struggle to find the right people for their business.
In this Q&A, she talks about recent trends in the insurance industry, the importance of working with the government and local authorities, the Treasury’s decision on the reforms of Solvency UK and challenges of finding the right talent.
What common trends did you see in retail products in 2022?
Given high interest rates, we are seeing an increasing number of quotes being requested compared with a year or two ago. This is good because the average person in the UK does need some form of guaranteed income and you can supplement it with other incomes.
This is an opportunity for insurers to innovate to provide additional services such as access to GPs. That will help take the pressure off the NHS.
Insurers can also provide innovation around longevity pooling, where retirees pool their funds, each year guaranteed to get an income based on survival. This is quite common in the US. The funds of those who recently died are distributed to surviving members. We think insurers can engage in this space because of low levels of saving.
In terms of pension risk transfers, could you give me a brief summary of how the market performed last year? How do you think the PRT market will perform this year?
The sector was pretty resilient and did quite well last year. It will be another good year for insurers in retail as well as in the institutional space.
What do you think of the government’s decision on the reforms of Solvency UK announced in November?
We welcome the consultation feedback from HMT, which really dropped most of the onerous elements of the proposed reforms. They have made a quite a good U-turn. In particular, the most relevant changes for annuity writers are the recalibration of the risk margin leading to a significant 60-70% reduction and the fact that the fundamental spread remains largely unchanged but with increasing sensitivity, to allow for notched differences to be made in ratings.
We also welcome the broadening of the scope of eligible assets under the matching adjustment to include assets with highly predictable cashflows. Obviously, the devil is in the detail. We’d like to know what highly predictable cash flows may mean.
We do think the government can work with local authorities as well as the insurance industry to help provide more private assets, because there is a limited universe of public and private assets.
Why are there limited opportunities to invest? We have an ageing infrastructure and housing stock here.
The demand from pension schemes outweighs the supply. There are limited opportunities for infrastructure and private assets. It is in everyone's interest to try to manufacture these assets, because many local authorities in the country need more development.
They need funding and support. It's not just in the North. Some parts of London are more developed than others.
Given the lack of opportunities, do you see insurers increasingly invest outside the UK?
Increasingly, with equity investments, some companies are doing primary listings in the US and in other markets to get better yield.
But the Prudential Regulation Authority has restrictions on how much you can take your assets abroad. Also, for annuity or decumulation products, if you invest abroad, you do need to have to convert your assets back to sterling if you've got UK liabilities. There is a bit of a haircut with currency hedging.
If you do quota share reinsurance, the asset and the longevity risks tend to be transferred to the US or Bermuda but the PRA manages this risk quite carefully so that no significant volumes of assets go offshore as the regulator is concerned about systemic risks.
What else is happening in the insurance industry?
Accessing the talent pool is another challenge for insurers and consultancies and this limitation is probably one of the factors that may slow the sector down.
Companies need very specialist skills. Firms need actuarial talent and people who are dealmakers, people who have strategic business acumen and commercial skills. They also need people who are able to work under pressure for long periods of time for things like mergers and acquisitions and people with knowledge in pensions and insurance.
Will the lack of talent slow down buy-in/buyout deals?
Pension schemes, trustees, pension consultants, life insurance consultants and insurers work quite well together. There is a good understanding of what is needed to close a deal. The industry has moved quite quickly to improve data and execution but there are only so many hands and some of the deals are quite complex, so they take time to execute.
