The outlook for the UK life insurance sector for the next 12 to 18 months remains “stable” as continued performance resiliency underpins operating profit growth, according to Moody's.
In a note to clients, the rating agency said its stable outlook factors in the sector's robust capitalisation and the positive impact on operating profits of expected pension, retirement and bulk annuity market growth.
Dominic Simpson, Vice President and Senior Credit Officer at Moody's, said: “These factors offset the negative pressure on margins from persistent regulatory headwinds and the high level of economic uncertainty from Brexit," says Mr. Simpson.
Continued growth in pensions and retirement products reflect rule changes giving savers more freedom to manage their retirement savings, as well as structural shifts such as pensions auto-enrolment and the move from defined benefits to defined contribution schemes.
While demand for bulk annuity products is strong, players in this market rely on reinsurers to off-load longevity risk, and the ability to source higher-yielding illiquid assets is critical to profitability.
“Solvency II capitalisation ratios are comfortable for most UK life insurers, but the UK regulator has increased its scrutiny of the matching adjustment. The outcome of its review of equity release mortgages may negatively affect the Solvency II ratios of some insurers most exposed to this product,” Moody’s said.
Increased regulatory scrutiny of the UK life sector as the FCA pushes to ensure fair treatment for customers is likely to exacerbate margin pressure, it added. The FCA review of individual pension and investment platform markets could lead to increased competition in these areas.
Moody's views that Brexit's impact on life insurers will likely be moderate and sees operational risk from Brexit as manageable, based on its current base case that the EU and UK will conclude an agreement.
However, in a "no deal" scenario, negative impact on sales will be more pronounced and increased volatility in financial markets would weigh on the UK life sector's capitalisation.
