From negative to stable – that’s how things are looking for the life insurance industry in the UK over the next 12 to 18 months.
Moody’s Investors Service cited the expectation of a moderate and manageable impact from Brexit as the main driver of the outlook change. It said low interest rates are not a key risk for UK life insurers, but margins could be pressured by ongoing regulatory probes.
“Our stable outlook primarily reflects our base scenario that Brexit’s impact on UK life insurers will be moderate over the next 12 to 18 months, given the resilience of the UK’s economy and financial markets following last year’s referendum,” said Dominic Simpson, vice president – senior credit officer at Moody’s.
They also do not expect the loss of ‘passporting’ to be a material issue, but Simpson said they do recognise that material uncertainty remains. What’s noteworthy is the business model of life insurers in the UK, which Moody’s believes has allowed the sector to maintain resilient performance amid increased competition.
Moody’s said several insurers have significant asset gathering and fee revenue generation capability since they have a strong presence in the growing pensions and retirement products market, aside from owning a dedicated asset management subsidiary.
It added that compared to life insurers in other countries in Europe, those in the UK are less vulnerable to low rates. Moody’s explained that while low interest rates weigh on investment returns, UK life insurers are less susceptible than some of their European counterparts because the majority of their reserves are unit-linked with no interest guarantees.
“Solvency II capitalisation is comfortable for UK life insurers, who reported year-end 2016 Solvency II ratios comfortably above the 100% threshold. Despite the high reliance on transitionals for the UK life sector, Moody’s sees the threat of regulatory intervention as being low as the UK’s Prudential Regulation Authority has confirmed the full capital benefit of transitional measures,” it said.
Meanwhile, several regulatory probes are expected to pose headwinds. In particular, Moody’s mentioned concern surrounding the Financial Conduct Authority’s review of non-advised annuity sales practices.
Related stories:
UK insurers hit by IFRS 17 shake-up
Brokers more worried over Trump than Brexit
