Regulatory pressure on earnings reinforces negative outlook for UK life sector
A combination of sustained low investment yields and pressure on profits as a result of regulatory scrutiny into how insurers treat their customers, has prompted Fitch Ratings to maintain its negative sector outlook for UK life insurance in 2017.
However, Fitch also said its rating outlook is stable, due to insurers’ diverse businesses and strong capitalisation that will help them to absorb the pressures they face. Most UK life ratings are likely to be affirmed over the next one to two years, the rating agency said.
UK life insurers are expected to have limited impact from Brexit, given the industry's domestic focus and the likely regulatory equivalence between UK and EU capital requirements after Brexit.
Fitch highlights that many UK life insurers do business in EU countries do so through local subsidiaries, and are therefore not exposed to a potential loss of passporting provisions.
When full Solvency II reporting comes into action in May 2017, Fitch expects the majority of UK life insurers to continue reporting strong capital positions.
Solvency II comparability between insurers across Europe will be improved by the new disclosures, which will help quantify the impacts of transitional allowances, Fitch said.
Furthermore, transitional allowance for UK life insurers are most significant on legacy annuity business, as Solvency II capital requirements for annuities have increased due to the risk margin for longevity risk, which has increased significantly as a result of low interest rates.
“Many investors view the risk margin as an uneconomic capital add-on, and, when comparing S2 results, will not seek to strip out the transitional allowances that insurers are applying to offset the risk margin,” said Fitch.
“Low yields do not weaken the capital position of annuity business under Fitch's Prism factor-based capital model and are not a direct threat to UK life insurers' ratings.”
Looking forward, Fitch expects other UK life market theme in 2017, such as an ongoing shift of the annuity market away from individual annuities towards bulk annuity deals, and increasing investment in alternative assets such as infrastructure, as insurers search for higher returns.
