Buy-in and buyout annuity sales hit their highest level in Canadian history in 2018, reaching $4.5 billion, an increase of $800 million over 2017, according to data from Eckler Ltd.
The purchases represent a 20 per cent increase in the volume of group annuities bought by Canadian pension plans, year over year. Buy-in annuities, which made up more than 50 per cent of the risk-transfer market in 2017, fell below 15 per cent of total group annuity sales in 2018. On the other hand, buyouts were the dominant annuity option in 2018, likely due to strong equity markets and decent bond yields through the first half of the year, noted the report.
While some insurers, including Manulife Financial Corp, left the risk-transfer market over the past decade, more are arriving. The Canadian market includes nine insurers with the addition of Assumption Life extending its group annuity services to new clients in 2018. Notably, Sun Life Financial had the largest proportions of sales in 2018, at 37 per cent, up from 30 per cent in 2017.
The rate at which Canadian pension plans purchased annuities remained volatile throughout the year, with some plans’ funded status affected by poor market conditions, while others already on the path to de-risking were undeterred from their purchases.
Looking ahead, the current volatility in equity markets and interest-rate pressure on fixed income will continue, maintaining volatility in annuity purchase rates, noted the report.
It also suggested the size of deals will continue to increase. Notable examples include the $350-million inflation-linked annuity purchased by Loblaw Companies Ltd., a deal split between Sun Life and BMO Insurance; Alcoa Corp.’s $700-million buyout annuity in April 2018, divided between Sun Life, Desjardins Insurance and iA Financial Group; and a $900-million buy-in transaction by an undisclosed company, split between Sun Life, the Canada Life Assurance Co. of Canada and the RBC Life Insurance Co.
As in the examples above, the trend towards multiple insurers splitting a single deal is helping them to offer better annuity prices by limiting exposure.
Outside of annuities, longevity risk insurance is an option that may deserve more attention, according to the report. While there have been just two longevity only insurance purchases by Canadian pension plans in the past five years, this option marks an important step for the industry, it said.
“While we believe longevity risk may not be getting the attention it deserves in the Canadian market, the use of longevity only insurance may remain sporadic unless pension plans’ mortality improvement assumptions converge with the more cautious assumptions taken by insurers and reinsurers,” the report noted.