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As with other forms of insurance risk, pension-related exposures are suited to syndication across organizations, Haasz said, predicting the emergence of new instruments over the next 12 to 18 months. Participants in such initiatives could include insurers, reinsurers or providers of a range of financial services, Haasz added. ?You need to start looking at different solutions,? he said.
Haasz was speaking in an interview about a deal between Prudential and U.K.-based communications company Cable & Wireless plc that saw the financial services group absorb the assets and liabilities of Cable & Wireless?s defined benefit pension plan. Cable & Wireless paid Prudential just more than 1 billion pounds (1.25 billion euros) to transfer the exposures from C&W?s books to its own (BestWire, Sept. 16, 2008).
It would be a mistake to conclude from the Cable & Wireless deal, Haasz said, that Prudential has ?just been given a billion pounds.?
?We have obviously been given a sum of money, a pool of assets,? he said. ?And our obligation in return for that is to commit to pay those pensions.?
The current market is characterized by what Haasz describes as very simple deals: For a sum of money, the insurance provider assumes the pension liabilities of the client. ?There is nothing intrinsically to stop an organization, having taken on those liabilities, to look at some way of reinsuring those with another organization,? he said.
Prudential has shown the discipline to adhere to what it regards as sustainable prices, Haasz said. Sensing that the market has become crowded, it has not taken on a large number of deals in 2007 and 2008, he said. ?We believe we have seen some prices written by other providers which we find very hard to understand,? he said, declining to name any of these providers.
?We think we?ve done a solid piece of analysis [on the C&W deal],? Haasz said. ?We understand the composition of that book. We understand mortality and therefore we have got an appropriate amount of provisioning for those benefits.?
Haasz is confident that Prudential, with its long experience with pensions, has ?a good handle on mortality.? But he is unsure that the same could be said about non-insurance organizations, such as investment banks, that might be attracted to the market.
The syndication of risk is central to Lloyd?s, where Haasz was director of market infrastructure and program management before leaving in 2007 to join Prudential. Lloyd?s has some lessons to teach, Haasz suggested. It is a market where ?for 300-plus years people have been sharing risk, competing and collaborating at both the same time,? he said.
Haasz is unlikely to have any difficulty in selling this way of thinking within Prudential. Nick Prettejohn, Prudential?s chief executive, was chief executive of Lloyd?s from 1999 to 2005, when he moved to Prudential (BestWire, Oct. 19, 2005).
Haasz doubts Prudential is the only company thinking about the syndication of defined benefit risks. There are capable organizations and capable people looking at the sector, he said. While Prudential may not necessarily have the best ideas from the start, Haasz said, he is confident that it ?can play a role in shaping the market and coming up with some very innovative solutions.?
Another form of syndication could involve the segmentation of deals by category. Prudential, for instance, might take on responsibility for all pensioners aged 60 to 65, while other organizations could take on those aged 65 to 70, and 70 and older.
?Those are fairly simple structures that are used in lots of other insurance markets and lots of other financial markets,? Haasz said.
Looking further ahead, Haasz sees the possible creation of insurance special-purpose vehicles, with the participation of hedge funds, private equity funds and other insurers. ?There is a big opportunity out there,? he said. ?I think lots of organizations are interested. But it?s an education process as well.?
Haasz regards these new ways of thinking as conceptually viable. The only questions, he added, are whether they would work in the current market and whether they would be acceptable to the trustees of pension funds. The requirement that fund operators look after the interests of their members, he said, means ?this isn?t a typical market in which you?re simply able to move money around as you see fit.?
The biggest potential downside to the market, Haasz said, is longevity. If C&W?s pensioners live longer, Prudential will see less profit, he said. Such calculations could become even more relevant ?if the clever people at Glaxo or any of the other pharmaceutical companies develop a live-for-25-years-longer pill,? Haasz said.
(By Robert O'Connor, London editor: Robert.OConnor@ambest.com)
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