Aon warns more demand for insurance buyout in DB space could test capacity, with market expected to reach £10bn by year end
The insurance buyout market for defined benefit schemes is enjoying a strong third quarter, building on the second-quarter surge of 80%.
But Aon Consulting claims the flood of activity raises questions over the market's ability to handle such high levels of demand.
The pension and benefit consultancy said the market is booming due to financial conditions and is currently valued at £2.7bn, up £1.2bn from the first quarter of 2008.
Aon said this figure could exceed £10bn by the year end.
The company's quarterly research suggests smaller deals might lose out to larger, more valuable deals as providers struggle to cope with demand.
Its study of the market's largest players said the 84 cases placed in the second quarter of 2008 was comparable to 86 of the previous quarter and the total value placed was over £847m more than the record fourth quarter of 2007.
Aon Consulting principal and actuary Paul Belok said: "The pensions buyout market has continued to be a beneficiary of the worsening economic conditions, picking up record levels of business during the second quarter of this year.
"While the volumes transacting are historically high, we have seen the first casualty in the battle for market share, with Synesis pulling out of the fray. On the other hand, Swiss Re is a new entrant and there may be more to come.
"We certainly expect to see continuing jockeying for position and inevitably some rationalisation of the participants in the market in due course."
High-profile buyouts in the second quarter this year included BBA, Delta, Rank and Friends Provident.
Aon warns with such high levels of activity, insurers are under considerable stress to cope with demand, leading to slower turnaround time, greater reluctance to provide full quotations and tighter selection criteria over which cases to focus on.
It said a side effect was less competition on cases of £20m or less with more providers focusing on larger schemes.
"At the other end of the spectrum, we are seeing increased interest from the 'big beasts', including a number of schemes over £1bn," Belok added.
"These cases are too large for many providers to swallow whole, so we are advising clients of this size on issues relating to syndication, coinsurance and effective ways of breaking things down into so that they can be placed with more than one insurer."
