The UK life insurance market can expect improving conditions in 2024 driven by strong sector fundamentals and a more favourable operating environment, according to a new report from Fitch Ratings (Fitch). The agency notes though that UK life insurance is the sole life sector in Europe to show signs of an improving outlook for 2024.
The credit rating agency said this improving outlook can persist despite challenges posed by macroeconomic and financial markets. It expects the pension risk transfer market to continue its strong growth throughout the year driven by a strong demand from corporates de-risking their balance sheets, which resulted from improved pension scheme funding levels following increases to interest rates in the last 18 months.
“Our improving outlook on the UK life insurance market is driven by strong sector fundamentals and our expectation of a more favourable operating environment in 2024,” said Rishikesh Sivakumar, association director at FitchRatings. “We expect the increased appetite from corporates to de-risk their balance sheets as a result of improved pension scheme funding levels amid higher interest rates to support the strong profitable growth of the UK pension risk transfer market.’’
According to Fitch, higher interest rates have been pivotal in boosting pension scheme funding levels, resulting in an easier offload of pension liabilities to insurers for corporates. For the rest of Europe, however, life sector outlooks are neutral, such as the muted macroeconomic backdrop.
UK asset and wealth managers operating in the workplace retirement segment will also benefit from resilient inflows, the report said, with support from fiscal incentives and the auto-enrolment system. The individual annuity market is recovering, with the largest insurers reporting sales growth. Fitch noted the volatile investment markets and high interest rates have boosted individual annuity volumes in 2023.
Fitch expects the capital position of most life insurers in the UK as well as their liquidity profile to remain “very” strong, driven by high interest rates, “resilient” capital generation, and “sophisticated” assets and liabilities management techniques.
“UK life insurers are exposed to credit risk in their investment portfolios but insurers’ asset portfolios are well diversified and defaults remain low,” the report said.
On the other hand, in relation to income from retail savings, the agency says clients are expected to remain cautious and selective although the impact of inflation on disposable incomes are expected to subside. “High retention rates are likely to partially offset sluggish inflows,” Fitch noted.
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