Interest rates hit Solvency II ratios across UK life sector

Solvency II ratios declined in the first half of 2016 across the UK life insurance sector, driven by a fall in interest rates, particularly following Britain’s decision to leave the EU, according to Fitch Ratings.

Solvency II requires insurers to hold a risk margin for longevity risk, a requirement that increases significantly when interest rates fall, according to Fitch.

On an economic basis, however, it said annuity business is well shielded from interest rate movements through the close duration matching of long-term insurance liabilities with similarly long-dated bonds.

Fitch said that low yields do not weaken the capital position of annuity business under its Prism factor-based capital model (Prism FBM), and are not a direct threat to UK life insurers' credit ratings.

Fitch commented: “The rating outlook for the UK life sector is stable, reflecting the diverse business mixes of rated insurers and their strong capital positions according to Prism FBM and under S2.

“These strengths have enabled rated insurers to withstand the decline of the individual annuity market and will help them to absorb the potential disruption and costs from regulatory investigations and ‘Brexit’.”