5 August 2020
Publication of paper by IFoA Matching Adjustment working party paper: “Challenges for insurers running Matching Adjustment portfolios”
In April 2018, David Rule (Executive Director of Insurance Supervision, Prudential Regulation Authority (PRA)) reported that the Matching Adjustment (MA) was worth £66bn to the UK insurance industry. Today, the value of the MA to the UK insurance industry is expected to be bigger than this, as a result of the strong growth seen in the bulk annuity market.
Without the MA – in which case annuities would have to be valued using the risk-free rate curve plus a Volatility Adjustment – annuity prices would increase, and it would not be affordable for many pension schemes to buy-out with an insurance company. The same is also true of individuals reaching retirement, where annuities can be an important part of the retirement toolkit for those wanting a stable income and longevity insurance.
So, the MA is important for UK insurers, UK pension schemes and individuals. However, running MA portfolios is far from plain sailing – insurers encounter a number of challenges on a day-to-day basis. The aim of the working party’s paper is to summarise some of these challenges, and to put forward high-level thoughts on some potential ways firms may be able to overcome them.
Looking to the future, the UK government has announced its intention for an Autumn Call for Evidence in support of its review of certain features of Solvency II – including the MA. The working party has therefore also provided some high-level thoughts on changes to the current MA framework that could be considered after the end of the Brexit transition period.