Fitch: Falling Yields Hit UK Life Insurers' Solvency II Ratios
S2 requires insurers to hold a risk margin for longevity risk, a requirement that increases significantly when interest rates fall, and an important consideration for annuity business. However, on an economic basis, annuity business is well shielded from interest rate movements through the close duration matching of long-term insurance liabilities with similarly long-dated bonds. Low yields do not weaken the capital position of annuity business under Fitch's Prism factor-based capital model (Prism FBM), and are not a direct threat to UK life insurers' credit ratings.
The rating outlook for the UK life sector is stable, reflecting the diverse business mixes of rated insurers and their strong capital positions according to Prism FBM and under S2. These strengths have enabled rated insurers to withstand the decline of the individual annuity market and will help them to absorb the potential disruption and costs from regulatory investigations and "Brexit".
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