Fitch: Negative Fundamentals Unlikely to Move UK Life Insurance Ratings
As announced in the 2014 budget, customers no longer have to buy an annuity with their pension pots. The GBP12bn-a-year annuity market has declined sharply, with many savers accessing their pensions as cash or via drawdown products instead. We expect sales to stabilise in 2016 at 30%-50% below the pre-2014 level. The consequences are negative for the sector's profitability but vary from one insurer to another, according to business mix. However, there are unlikely to be material rating implications as rated insurers can absorb the negative effects given their diverse businesses and strong capital positions - important factors underpinning their ratings.
The Prudential Regulation Authority's approval of 19 major insurers' internal models in early December 2015 was a major step towards clarity on their capital position under Solvency II and we believe it is a precursor to announcements of strong solvency ratios. Major UK life insurers already appeared on track to report strong Solvency II capital after announcing substantial interim dividend increases. We do not believe these increases would have been announced had there still been significant uncertainty over Solvency II capital strength. This capital strength reflects insurers' high-quality bond portfolios, duration-matching of fixed liabilities and limited exposure to unhedged equity risk.
The UK life sector is fairly immune to low interest rates. In contrast to business in some European insurance markets, notably Germany, UK life business does not generate significant interest-rate risk. Annuities are the only major UK life product with onerous long-term investment guarantees. However, these are typically single-premium contracts backed by duration-matched assets, so there is minimal interest-rate risk related to the investment of future premiums or reinvestment of maturing assets.
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