Author: Nick Johnson
7 August 2014
Now the tears have dried following England’s short break in Brazil (which is more than can be said for those of the host nation), I’m left wondering if our campaign was doomed to failure before it began, simply by the amount of baggage our team and their party were carrying.
Quite aside from Colleen Rooney’s impressive array of Louis Vuitton finery, her other half was struggling with a weighty burden of past tournament failures – still combined with the odd unrealistic expectation. To a greater or lesser extent, the same was largely true of the rest of the squad.
The baggage we carry around can prevent any of us from achieving the great things we aim for. In the bulk annuities industry, we may not have to bear the weight of 48+ years of hurt, but we do have plenty of baggage of our own. Here’s a brief inventory of some bulky items we’d do well to unload before setting out on future journeys together...
BULKY ITEM ONE
In any bulk annuity transaction, either the trustees or insurer has to ‘win’
Often, the trustees perceive that playing insurers off against each other is the best way to get a deal. Whilst clearly some element of competition is healthy, many advisers take a confrontational view that either the insurer has to write a deal at a level it is unhappy with, or the trustees have to pay too much.
With the transaction forming the first stage of a very long term relationship – between trustees and insurer as well as members and insurer – isn’t it better to see it as an opportunity for mutual benefit?
BULKY ITEM TWO
The best price is only achieved through a highly competitive auction process
Bulk annuity prices are driven by market prices on a day-by-day basis, so there’s no guarantee that the best deal on one day will remain so on another. In addition, it’s likely that buy-out prices will move differently to the scheme's assessment of value (whether this is technical provisions or pure monetary value). Against this background, market movements can produce bigger changes in price than competitive pressure.
Essentially this means that a number of market-related factors determine the gap between the amount the trustees can afford to pay and the level at which the insurer is prepared to write the business. Purely focusing on competition to close this gap may mean missing out on a number of other key drivers.
BULKY ITEM THREE
Trustees and their advisers conspiring to present only the information that reduces prices
Quite simply, insurance is all about placing a monetary value on certain risks. In doing this, the insurer accepts that there are certain unknowns. But by taking appropriate averages – based on the available data and writing a large number of similar risks – the uncertainty over events happening should be reduced.
This is all pretty intuitive, but one thing insurers worry about is not having full information, so that the person buying the policy has an unfair advantage and can skew the 'odds' in their favour. Given the size and complexity of bulk annuity contracts, and the number of skilled and experienced advisers involved in the process, it’s easy to get paranoid. However, we shouldn't lose sight of both the trustees’ and their advisers’ professional responsibilities. This is coupled with the simple fact that a lot of the 'science' behind pricing of these contracts means it’s hard for them to judge what would and wouldn't increase prices. You might remember this thorny issue from my blog on medical underwriting.
Isn’t it better to travel light?
If this industry is to fulfill its potential, and to deliver the solution that so many schemes are desperate for, then we have to agree to live without the baggage.
I'm certainly not confident that Colleen will ever travel without her 12 Louis Vuitton bags... But I’m willing to commit to trustees that I am willing to throw away my baggage if it helps get deals done. I just ask you join me in my ambition.