Solvency II (S2) ratios declined in 1H16 across the UK life insurance sector, driven by a fall in interest rates, particularly after the leave outcome (Brexit) in the EU referendum, says Fitch Ratings.
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.
Fitch said 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.
The ratings agency said 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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