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Demographic change is becoming a structural driver of life insurance M&A. Declining birth rates and rising life expectancy are reshaping pension systems globally and accelerating private sector involvement in retirement provision.
In many countries, life insurers already play an important role in helping people to save for retirement and then to secure a retirement income. Growth in private pensions represents an opportunity for life insurers.
The projected growth in the global life-insurance and pension de-risking sector has driven a good deal of activity in recent years, but the focus of this article is more specific. When life insurers provide pension products, assets supporting those products accumulate on the life insurers' balance sheets, often staying there for decades. Globally, those assets will be valued in the tens of trillions of dollars.
The relevant part of the life insurance market can be divided broadly into two categories:
- The "capital light" model: Where assets accumulate for the policyholders' benefit (eg, unit-linked pension products), the insurer tends to generate fee-based income. This approach does not usually require high levels of regulatory capital, mainly because the risks faced by the insurers are modest.
- The "capital intensive" model: Where the assets accumulate for the insurer's benefit, the insurer generally relies less on fees. Those assets are typically held by the insurer as capital against some form of guarantee the insurer has given to its policyholders (eg, to pay them income for as long as they live). The insurer's profits in those cases relies to a significant extent on the assets' values (derived from both income and capital appreciation) being more than the corresponding liabilities. This tends to be capital intensive under the applicable solvency regulations as the insurer is exposed to considerable risks.
Whilst there is common ground on the demographic and macro-economic drivers of activity, the scale of the opportunity, the concentration of assets and a spectrum of investor views on which model is the better prospect are resulting in a wide variety of transaction types and investors in the life insurance sector.
Read our more detailed insights here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
