Shifts in demographics and regulation may see life insurers and financial institutions drift towards the annuities market, Morningstar has predicted.
In a research report on Challenger Limited, released yesterday, Morningstar analysts forecasted that new players in the annuity market could threaten Challenger’s current position as a “clear leader”.
“We expect increasing long-term demand for retirement income solutions, given the demographic shifts of an ageing and growing population and longer life expectancy,” the report said.
While Challenger was “the clear leader in the Australian retail annuity market with strong brand recognition and broad distribution”, Morningstar analysts said they “do not believe the barriers to entry are strong enough to stop existing competitors or new entrants”.
“We expect life insurers such as Tower Australia and AMP and all the major banks to look to service this market as demand for annuities from customers and advisers increases,” the report said.
The report also signalled that government policy would change to “be more supportive of a greater use of annuities as part of retirement income strategies” and that greater competition would be encouraged in this area.
“As the customers of these financial institutions enter the retirement phase of their lives, it makes sense to seek to keep them as clients by offering a full suite of retirement products,” the report said.
“The major banks and AMP have large customer bases and owned distribution capabilities, which puts them in a strong position to manufacture and distribute competing annuity products.”
Aside from new competition, Morningstar also indicated key risks for Challenger would be volatile investment markets, inflation and longevity risks.
“As the annuity book grows, it also becomes harder to find new investments that will generate returns above required payments to annuity investors, so risk management is critical,” the report said.
“Challenger has to be very vigilant in how far it goes up the risk curve to generate the required returns.”
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