Strong 2011 results from UK life insurers have
confirmed that most of the sector is sheltered from the sovereign
debt crisis in the eurozone, according to Fitch Ratings.
The rating agency says that in contrast to
several European insurance groups, most major UK life insurers have
negligible direct exposure to the sovereign debt of Greece, Italy,
Ireland, Portugal and Spain (GIIPS) – and typically less than
5% of shareholders equity. The notable exception is Aviva, which
has significant exposure to Italian sovereign debt supporting its
sizeable operations in Italy.
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In its latest report, published in April 2012,
Fitch Ratings says companies, such as Aviva, Legal & General
Group and Prudential, which have large annuity portfolios are still
holding significantly increased provisions established in the
financial crisis for potential credit defaults on assets backing
their annuity business.
Fitch expects these provisions to prove more
prudent than necessary and therefore to represent a material future
source of additional capital, although Solvency II may consume this
with higher capital requirements.
A time of change
The UK life sector is preparing for a
combination of reforms that will transform regulation and
distribution, with implications for capital management, product
design and pricing.
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By GlobalData“The ultimate impact of Solvency II hinges on
several major decisions still to be made. A feature of the UK life
sector is the large volume of annuity business. Under Solvency II,
capital requirements for annuities stand to be more onerous, and
although industry lobbying against this is having an impact, it is
still not clear how much extra capital annuity providers may need,”
said Fitch Ratings.
The FSA’s Retail Distribution Review (RDR),
due to take effect at the start of 2013, will bring about a
step-change in how investment advice is paid for and significantly
impact the UK life insurance market.
RDR means that advisers will no longer receive
sales-based commissions from insurers, but will instead charge
explicit fees directly to customers.
Impact of RDR
Fitch expects some short-term market
disruption as advisers and consumers adapt to the new rules, and a
shift of some customers away from the independent financial adviser
sector towards cheaper, restricted advice or no advice at all.
Overall, Fitch maintains its stable rating
outlook for the UK life insurance sector, indicating that a vast
majority of UK life insurer ratings will be affirmed over the next
12-24 months.
It also expects profitability to lag
pre-crisis levels as a consequence of the lower interest-rate
environment and the steps taken by insurers to reduce investment
risk.
“Over the next 12-24 months, Fitch’s primary
rating concerns for the UK life insurance sector are uncertainty
about the economic outlook and the potential disruptions to
insurers described above,” said the report.
