Overview
UK life insurers are poised to continue benefitting from strong bulk annuity volumes in 2025 despite potential challenges from regulatory changes, according to Fitch Ratings report. Beinsure analyzed the report and highlighted the key points.
Fitch expects transactions to surpass GBP40 bn for the third consecutive year, supported by favourable market dynamics and substantial capital inflows.
UK insurance sector are likely to pass on more of the interest they earn on customer cash balances to protect their reputations as customer fairness regulation introduced last year continues to drive changes.
5 key highlights
- Despite regulatory changes, bulk annuity volumes are forecasted to exceed £40bn, supported by strong sponsor demand, favourable market conditions, and substantial capital inflows.
- Royal London, Utmost, and Blumont Annuity have recently joined the market, bringing significant capital and asset-sourcing capabilities, revitalising deal activity, especially for smaller pension schemes.
- Reinsurers continue to play a vital role in supporting large bulk annuity deals. However, funded reinsurance is not expected to exceed 30% of total premiums as insurers manage concentration risks.
- New rules requiring insurers to demonstrate fair value in pricing are expected to lower profitability. Insurers are likely to increase interest paid on customer cash balances and reduce charges to avoid regulatory scrutiny and reputational risks.
- The PRA’s plan to ease matching adjustment approvals could allow insurers to respond faster to investment opportunities. However, insurers must maintain contingency plans and follow prudent investment principles, limiting any material increase in risk appetite.
Fitch Ratings believe insurers will consider the extra costs negligible compared with the risk of being named and shamed by the regulator.
Sponsors Seeking to Transfer Pension Liabilities to Insurers
The UK government’s proposal to permit well-funded pension schemes to release surpluses to sponsoring employers may temporarily reduce the flow of bulk annuity transactions.
However, demand from sponsors seeking to transfer pension liabilities to insurers remains strong as they aim to reduce balance-sheet risk.
The life insurance sector is well-positioned to meet this demand, supported by strong capital levels and several recent market entrants attracted by the predictable long-term returns of bulk annuities.
The bulk annuity market remains difficult to enter, requiring substantial long-term capital, expertise in asset sourcing, actuarial modelling, risk management, and regulatory approval. Despite these challenges, several new entrants have joined recently.
Bulk Annuity Volumes
Royal London and Utmost entered the market in 2024, followed by Blumont Annuity this year. These firms bring significant capital and asset-sourcing capacity, contributing to increased deal activity, particularly from smaller pension schemes.
Established insurers have responded by implementing price monitoring and simplified solutions for small schemes, while those with excess capital continue to target larger transactions.
Interest from reinsurers in the UK
Interest from reinsurers in the UK bulk annuity market is growing. InEvo Re, launched by Macquarie Asset Management, completed its first reinsurance deal with a UK life insurer in the first quarter of 2025.
Although market activity slowed in late 2024 due to tighter regulations, the use of funded reinsurance remains a key feature in supporting large transactions.
However, funded reinsurance is unlikely to account for more than 30% of bulk annuity premiums.
Bulk Annuity New Business Premiums
New rules requiring UK financial services companies to show that their prices represent fair value to customers will negatively affect life sector profitability.
The consumer duty rules, as well as driving insurers to pay more interest on cash balances, may lead to further reductions in customer charges to avoid potential findings of overcharging and the reputational damage that could result.
Insurers are expected to limit their exposure to individual credit-focused reinsurers to manage concentration risks.
The Prudential Regulation Authority’s upcoming life insurance stress test (LIST 2025) will offer further insight into bulk annuity providers’ risk exposure and financial strength.
Insurers’ demand for long-term illiquid assets continues to grow, with increasing allocations to private assets, including private credit.
Fitch has identified exposure to private credit as a key area of focus, given its associated risks and limited transparency.
However, insurers are expected to maintain diversified asset portfolios and limit their exposure, consistent with their conservative risk profiles and regulatory oversight.
The PRA’s recent proposal to remove the requirement for insurers
The PRA’s recent proposal to remove the requirement for insurers to obtain regulatory approval before claiming ‘matching adjustment’ benefit on certain assets could make it easier for insurers to take advantage of investment opportunities more quickly.
The matching adjustment allows insurers to take credit for the illiquidity premium earned on certain assets that will be held to maturity by factoring it into the discount rate for their annuity liabilities.
The proposal, if adopted, may lead to higher investment risk due to the increased flexibility that insurers would have when making investment decisions.
However, we do not expect a significant shift in insurers’ investment risk appetite as the regulator would require firms to have contingency plans for assets that do not receive subsequent approval for matching adjustment eligibility, and it would still expect them to adhere to the ‘prudent person’ principle in making investment decisions.
FAQ
The proposal allowing well-funded pension schemes to release surpluses to sponsoring employers could temporarily reduce the volume of bulk annuity transactions. However, demand from sponsors looking to transfer pension liabilities to insurers remains strong, driven by the need to manage balance-sheet risks.
Entering the bulk annuity market requires significant long-term capital, expertise in asset sourcing, actuarial modelling, risk management, and regulatory approval. Despite these barriers, several firms, including Royal London, Utmost, and Blumont Annuity, have recently entered the market, increasing competition and deal activity, particularly for smaller pension schemes.
Tighter regulations slowed market activity in late 2024, but funded reinsurance remains important for supporting large bulk annuity transactions. Despite this, the share of funded reinsurance in bulk annuity premiums is expected to remain below 30%, as insurers aim to manage concentration risks by limiting exposure to credit-focused reinsurers.
The upcoming LIST 2025 will assess bulk annuity providers’ risk exposure and financial strength. The results will provide greater transparency into insurers’ vulnerabilities, especially regarding asset risks and reinsurance exposures.
The consumer duty regulations require financial services firms to prove that their prices offer fair value to customers. This is expected to reduce life insurers’ profitability, as firms may increase the interest paid on customer cash balances and lower charges to avoid accusations of overcharging and reputational damage.
Insurers are expanding their investments in long-term illiquid assets, including private credit. This area poses risks due to limited transparency. Fitch expects insurers to manage these risks by maintaining diversified asset portfolios and limiting exposure in line with their conservative risk appetites and regulatory expectations.
The PRA has proposed removing the requirement for insurers to obtain pre-approval for claiming matching adjustment benefits on certain assets. This could allow insurers to respond more quickly to investment opportunities. However, Fitch does not expect a significant increase in investment risk appetite, as insurers must maintain contingency plans for ineligible assets and adhere to the prudent person principle when making investment decisions.
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AUTHORS: Rishikesh Sivakumar, CFA – Associate Director, Insurance at Fitch Ratings, David Prowse – Senior Director at Fitch Wire, Graham Coutts, ACA – Senior Director, Insurance at Fitch Wire
