AM Best maintaining Stable market outlook for the UK Life Insurance

The positive factors underpinning the stable outlook for the UK life insurance segment include a strong pipeline for pension risk transfers, sufficient capitalisation for medium-term expansion, and the need for illiquid assets to support investment earnings decreases with rising interest rates, according to AM Best.

After a recovery from pandemic-related issues in the past two years, the UK economy grew by 4% in 2022, but it still remained 0.6% below pre-pandemic levels and is predicted to shrink by 0.3% in 2023 before growing in 2024.

Inflation remains high, with the UK Consumer Price Index estimated at 10.4% in February 2023, leading the Bank of England to increase its policy rate to 4.25% in March 2023, but future interest rate changes are uncertain as inflation is expected to decrease in the latter half of 2023, despite being higher than predicted.

The business pipeline for the UK life market remains resilient due to the dominance of pension-related products in the segment.

Economic uncertainty is still being affected by the conflict in Ukraine and the international sanctions imposed on Russia, which have led to heightened geopolitical tensions.

Best stated that although high inflation and negative real wage growth has affected consumer spending and demand for insurance products, the UK life market’s business pipeline is strong, driven by pension-related products, particularly bulk annuity transactions.

Rising interest rates make such transactions more affordable for defined benefit schemes as this improves funding ratios and could accelerate the de- risking strategies of a number of their sponsors.

Although rising interest rates have reduced the value of fixed income securities and harmed shareholders’ equity, UK life insurers have strong ALM capabilities, matching investments with the duration of their liabilities.

Insurers, particularly life insurers, are facing various challenges with the implementation of IFRS 17, including operational issues like system upgrades and process redefinition, as well as strategic concerns such as educating internal and external stakeholders about new financial metrics.

The change impacts on a number of financial metrics widely used across the segment, including return on equity and leverage calculations.

Most life insurers expect to report improved returns on equity, while at the same time use CSM in their leverage calculations.

After a period of consistent growth, pension-related products have become the dominant force in the segment.

Life insurers are expected to continue profiting from the growth of the defined contributions pension savings market, due to employee auto-enrolment, while the bulk purchase annuity market is expected to remain a significant driver of the UK life segment’s business, boosted by the effect of rising interest rates on plan funding and the resulting de-risking capacity of pension schemes.

The proposed change in asset eligibility rules for the matching adjustment as a vital part of the reform, as it will allow annuity writers to broaden their investment options to meet high demand for PRT solutions, even though it will not directly affect capital ratios.

Reduction to the risk margin for long-term life insurers will not have a significant impact on the amount of longevity reinsurance purchased by UK annuity writers in the near term, as reinsurance still has a strong strategic purpose.

Nataly Kramer   by Nataly Kramer