Moody's report, "Life insurance -- UK: Expectation of continued resilient performance drives stable outlook ,"
The rating agency's report is an update to the markets and does not constitute a rating action.
"Our stable outlook on the UK life insurance industry factors in the sector's robust capitalization and the positive impact on operating profits of expected pension, retirement and bulk annuity market growth," says Dominic Simpson, Vice President -- Senior Credit Officer at Moody's.
"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. Increased regulatory scrutiny of the UK life sector as the FCA pushes to ensure fair treatment for customers is likely to exacerbate margin pressure.
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 our 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.
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