Fitch warns of negative sector outlook for UK life market in 2017

Fitch Ratings has warned that threats to profitability from regulatory scrutiny into how insurers treat their customers, and sustained low investment yields, contribute to a negative sector outlook for UK life insurance in 2017.

However, the ratings agency said insurers' diverse businesses and strong capitalisation will help them to absorb the pressures they face and Fitch's rating outlook for the sector is therefore stable.

This indicates that most UK life ratings are likely to be affirmed over the next one to two years.

Limited Brexit impact

Fitch said it expects the impact of Brexit on UK life insurers to be limited, given the industry's domestic focus and the likely regulatory equivalence between UK and EU capital requirements after Brexit.

Most UK life insurers that operate in other EU countries do so via local subsidiaries and are therefore not exposed to a potential loss of passporting provisions.

Full Solvency II (S2) reporting will begin in May 2017 and Fitch expects most UK life insurers to continue reporting strong capital positions.

The new disclosures will quantify the impacts of transitional allowances, helping to improve S2 comparability between insurers across Europe.

For UK life insurers, Fitch said transitional allowances are most significant on legacy annuity business.

S2 capital requirements

S2 capital requirements for annuities have increased due to the risk margin for longevity risk, which has increased significantly as a result of low interest rates.

However, the ratings agency said many investors view the risk margin as an uneconomic capital add-on, and, when comparing S2 results, will not seek to strip out the transitional allowances that insurers are applying to offset the risk margin.

Low yields do not weaken the capital position of annuity business under Fitch's Prism factor-based capital model and are not a direct threat to UK life insurers' ratings.

Other UK life market themes Fitch expects in 2017 include an ongoing shift of the annuity market away from individual annuities towards bulk annuity deals, and increasing investment in alternative assets such as infrastructure, as insurers search for higher returns.