2014 – the year where Solvency II got real and we all bought Lamborghinis

2014 was a busy year for the actuarial world. Reading back over our blogs shows just how many things happened in the last twelve months, but there are three key reasons we will remember 2014; as the year Solvency II ‘got real’, and the year that both the annuity market and Barnett Waddingham changed forever.

Solvency II

Throughout the year we have worked hard to keep you up-to-date with Solvency II progressions. The result is a veritable mine of information that, while extensive, is not easily searchable. In case there is something you missed, or something you want to read up on as you warm up for 2015, you can find everything we had to say about Solvency II last year at the bottom of this blog.

The main news in 2014 concerned the Matching Adjustment; although there was relief that the criteria were finally established, some firms will have found a lot more to do than they anticipated. With Omnibus II setting out the finalised matching adjustment criteria the focus turned to the practicalities of how firms can ensure their assets are eligible and provide the evidence required by the application process. Firms were strongly encouraged to participate in the pre-application process, producing a near final submission to be submitted to the PRA between 1 December 2014 and 6 January 2015. At the time of writing there are still a few days left!

In October we briefed our readers on the summer activity from the PRA and EIOPA, looked at what was coming in the latter part of the year, and found out what elements of Solvency II might be keeping you up at night. Throughout 2015 we will be just as diligent in keeping you up-to-date with Solvency II as implementation nears, so keep an eye on our website for a similar briefing early in 2015 and e-mail Kim Durniat if you would like to subscribe to our regular blog roundup.

SIIMPLIFY

In December we launched SIIMPLIFY – A Pillar to Pillar Solution to help firms quickly and easily calculate capital levels and meet reporting requirements. Throughout 2015 we will be offering SIIMPLIFY demonstrations. If interested please e-mail Kim Durniat.  

The regulator and the annuity market

In April 2013 we wrote a blog on the change of financial regulator from the FSA to FCA and PRA. The new regulators have now been in force for a little over 18 months and have not hesitated to flex their regulatory muscles, with significant effect. The FCA’s business plan gives some indication of the areas that are being looked at; below we talk about some of the areas where the FCA has already forced action.

Thematic review of annuities

In February, the FCA published its TR14/2 thematic review of annuities. The main conclusion of this paper was that individuals purchasing their annuity from their current provider could get a better deal by shopping around in the open market. Many commentators were quick to point out the link between this paper and the subsequent pension freedoms brought in as part of the 2014 Budget. With the full extent of the reforms due in 2015 we have yet to see how retirees’ behaviour will change, but early indications have suggested the individual annuity market could shrink by as much as 75%. Annuity providers are still hard at work developing products to win back some business and we expect to see on the market shortly some or all of the following:

  • Surrenderable annuities.
  • With-profits annuities.
  • U-shaped annuities (high income in the active years immediately following retirement, lower income as activity decreases, with income picking up again in the expectation of paying for medical care).
  • An increase in drawdown products.

Our last update on the bulk annuity market was produced following the Budget. Whilst not directly affected by the reforms, the bulk annuity market has seen some knock-on effects. The ‘old-guard’ of multi-line insurers have been noticeably stepping up their efforts in a bid to offset decreasing individual annuity sales, with Legal & General leading the way due to its £3bn transaction with part of the ICI Pension scheme and the more recent £2.5bn buy-in with the TRW Pension Scheme. Partnership has broken new ground by upping the size of schemes opting for medical underwriting. The latest, a £206m transaction, involved ‘top-slicing’ the members with the largest pensions. The deals in the build up to Christmas were summarised in our Corporate Consulting team’s quarterly roundup.

Unit-linked funds

Unit-linked funds have been high on the FCA’s agenda for some time. In October 2013 the FCA published the results of its first thematic review concerning the governance of unit-linked business. This lead the Association of British Insurers (ABI) to review its guidelines on unit-linked funds, and an update was published in May 2014. The ABI expects firms to have spent some of this year reviewing their operations against the updated guidelines and be making progress towards following them by the end of 2014.

Behavioural Economics at the FCA

Way back in 2013, the FCA published two papers on behavioural economics. Since then the FCA has been exploring how people make financial decisions in the real world, why people don’t act rationally all the time, and how companies can be prevented from taking advantage of consumers. It wasn’t until 2014 that the FCAs adoption of behavioural economics really began to take effect, and throughout the year we wrote a series of blogs to help you understand what behavioural economics is and how the FCA is using it. These blogs can be found at the following links:

All change at Barnett Waddingham

In 2014 we welcomed Scott Eason as the new Head of Insurance Consulting. Scott comes to Barnett Waddingham with insurance industry, consulting and banking experience. Scott’s remit is to develop insurance consulting at Barnett Waddingham. This will be done by focussing our key areas of expertise which with Scott’s arrival have been strengthened particularly in the investment area.

David Hughes joins the team to develop our analytics and pricing services to the general insurance industry. We can now offer you market leading pricing and analytics solutions for your portfolios. Look out for David’s blogs in 2015 and feel free to contact us to learn more about our exciting new capabilities. Next year we will be adding to the team to complement, widen and strengthen our areas of expertise.

Happy New Year.