Overview
AM Best maintains a stable outlook for the UK life insurance market, supported by strong pension-related activity, steady expansion in defined contribution (DC) pensions, and solid investment returns due to sustained interest rate levels.
Some concerns persist regarding regulatory oversight, particularly around funded reinsurance, according to AM Best’S Market Segment Report.
Pension Risk Transfers Remain a Key Segment Driver
Pension risk transfers (PRTs) remain the dominant product line in the UK life insurance sector. In 2024, PRT deals generated over £50bn in premium volume.
Higher interest rates have improved the funding status of defined benefit (DB) schemes, making PRT transactions more financially attractive for plan sponsors.
Life insurers can offer competitive pricing due to their asset origination capabilities and access to favourable reinsurance terms.
Large transactions, including multi-billion pound “jumbo” deals, continue to shape the PRT landscape.
These are usually managed by the largest insurers. AM Best expects volumes in 2025 to remain close to 2024 levels.
Technology-enabled solutions have made PRT deals more accessible, especially for smaller pension schemes.
In addition, insurers have introduced new structures—such as those involving captives—that aim to align interests with plan sponsors by sharing both risks and returns.
Defined Contribution Market Expands Revenue Base
The DC pension segment is growing steadily, driven by mandatory employee auto-enrolment and wage increases that raise contributions.
Unlike DB plans, DC schemes primarily hold assets for members still accumulating savings, and their overall assets under management (AUM) are expected to grow rapidly.
Since 2012, the DC segment has seen increasing consolidation, favouring firms with scale. AM Best anticipates that barriers to entry will remain high.
The upcoming Pension Schemes Bill, planned for 2025, is likely to accelerate consolidation by requiring minimum AUM thresholds and limiting default investment strategies.
UK life insurers are poised to continue benefitting from strong bulk annuity volumes in 2025 despite potential challenges from regulatory changes, according UK Life Insurance & Annuity Market report.
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.
Favourable Rate Environment Supports Insurer Returns
Although interest rates are expected to decline modestly, current levels still support attractive returns on insurer investments.
This reduces the need to rely heavily on illiquid assets, although these will remain an important part of investment portfolios given the long-term liabilities typical of life insurance.
The UK government’s Matching Adjustment Investment Accelerator is expected to ease regulatory restrictions, helping insurers achieve capital relief on qualifying long-term assets and maintain their allocations to illiquid investments.
Ongoing Focus on Funded Reinsurance Risks
Funded reinsurance has become a widely used tool for supporting PRT deals. These arrangements reduce capital needs for direct insurers and support pricing flexibility. However, regulatory scrutiny remains high.
The Prudential Regulation Authority (PRA) has added a funded reinsurance recapture scenario to its 2025 stress testing for life insurers.
This follows concerns about rising credit and concentration risks, particularly when reinsurers operate outside the UK regulatory perimeter.
Such exposures could cause problems if insurers need to recapture assets after a counterparty default.
Oversight from the Bermuda Monetary Authority—responsible for regulating a significant share of funded reinsurance capacity—may help mitigate risk, offering some reassurance for UK cedants.
FAQ
AM Best maintains a stable outlook due to continued growth in pension risk transfers (PRTs), rising revenues in the defined contribution (DC) segment, and sustained investment returns supported by high interest rates.
High interest rates have improved defined benefit (DB) scheme funding levels, making PRTs more attractive to sponsors. Life insurers offer competitive pricing and have access to diversified investment strategies and longevity reinsurance.
The UK PRT market recorded over £50bn in premium volume. AM Best expects similar levels in 2025, including continued large-scale transactions involving major insurers.
Some insurers have adopted digital solutions that streamline the PRT transaction process. These systems reduce costs and make transactions more accessible for smaller schemes with limited administrative resources.
Ongoing employee auto-enrolment, higher salaries, and the accumulation-focused structure of DC pensions are expanding marketwide AUM. This supports revenue growth for life insurers active in the segment.
Regulators are concerned about the credit and concentration risks associated with reinsurers based outside the UK. The PRA has introduced stress tests to assess the impact of asset recapture following potential reinsurer defaults.
While some rate reductions are expected, current levels still support strong returns. Insurers are less dependent on illiquid assets, although such investments remain important due to the long-term nature of life insurance liabilities.
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AUTHORS: Ghislain Le Cam, CFA, FRM – Senior Director, Analytics at AM Best (London), Stanislav Stoev – ACCA, CFA Senior Financial Analyst at AM Best (London), Richard Banks – Director, Industry Research – EMEA (London), Richard Hayes – Director, Industry Research (London)
