S&P Global Market Intelligence noted that UK insurers face challenges in maintaining strong balance sheets and managing asset and liability risks amid volatile financial markets, rising funding costs, and demographic trends, with growth and earnings potentially being volatile.
Global Life Insurance Industry in 2023 is facing an inflection point. Over the past decade, the UK life insurance and retirement industry has experienced increasing instability too. A confluence of factors has deeply affected the industry’s performance in recent years.
U.K. insurers that successfully make the most of growth trends and innovate to cater to new demands and risks could further cement their competitive positions and develop sustainable earnings and capital profiles, supporting their creditworthiness.
Due to uncertain economic conditions, life and non-life insurance companies in the UK need to reconsider their capital allocation, product strategies, and business models.
The upcoming Solvency II reforms in the UK could allow for more flexibility in asset allocation and capital release, but insurers’ risk appetites and approach to additional capital release will be important factors in determining their creditworthiness.
UK insurers need to reconsider their capital allocation strategy due to the current economic climate, including high interest rates and the possibility of a recession, the rating agency noted.
They also need to adapt their product offerings to account for demographic, climate, and technological changes, while balancing strategic goals with stakeholder demands and maximizing risk-adjusted returns.
Several U.K. insurers rehaul their business models, for example by divesting operations, rebasing capital strategies, or seeking external and inorganic growth via consolidation.
The UK life insurance market will continue to maintain strong capitalisation despite the government’s proposals to loosen Solvency II (S2) rules to release capital for insurers to invest more in long-term assets.
To maintain their position in the UK economy, UK life insurers must secure long-term funding from investors with matching objectives and realign their operating models and investment strategies with new shareholders.
Pension reforms and the dominance of defined contribution pension products present growth opportunities for UK insurers, particularly in the bulk annuities market.
Real estate may be vulnerable, but equity release mortgages and rental covers could become growth areas.
Evolving wealth management needs for consumers highlight the need for growth products that come with financial advice and secure income, such as fixed annuities or guaranteed savings.
However, insurers often worked around the existing requirement by restructuring assets to create fixed cash flows. In such cases, the new criteria would simply remove the frictional cost of restructuring rather than increasing the supply of underlying assets.
In addition, the government has indicated that assets without fixed cash flows may be given less matching adjustment credit in the liability discount rate, which could limit their attractiveness.
by Yana Keller