International financial services ratings agency, A.M. Best, has a stable outlook on the UK life insurance sector, and is expecting a focus on annuities and defined contribution pensions to drive strong near-to-medium-term growth opportunities.
Key products in the UK life insurance industry are experiencing healthy growth and profitability, but A.M. Best warns that currently, the active product profile has become somewhat concentrated and is closely linked to pension provision, with the majority being sold in a business-to-business marketing landscape.
The narrow range of activity currently underpinning the sector, is giving rise to some āfragility in business modelsā warns A.M. Best.
Following the demise of the UK with-profit solution and the reduced role of investment bonds, the outlook for life insurers in the UK has been dominated by pension-related products. Subsequently, the UK life insurance sectorās role in the non-pensions saving space has diminished markedly.
āA result of these changes is that UK life insurers have evolved to focus on products that AM Best believes will provide strong growth over the near and medium terms, due principally to a strong pipeline of bulk annuity transactions and the accumulation of defined contribution (DC) pension assets,ā says A.M. Best.
Furthermore, sales of individual annuities are again on the rise, following a steep decline to a lower base after the 2015 changes to UK pension regulations.
Regulatory change is another important factor when looking at the UK life insurance sector, with companies often finding regulatory change a challenge.
āAM Best views the segmentās increased investment allocation to illiquid assets as, at least directionally, an appropriate and positive step. But it will test the risk management of even the most well- managed companies and increase investment risk,ā continues the ratings agency.
Also driving additional investment risks for the UK life sector, according to A.M. Best, is Brexit. Furthermore, the UKās planned departure from the European Union (EU) could also lead to a diminished fungibility of capital for the larger players with subsidiaries in the EU outside the UK.
For UK insurers and reinsurers, the ongoing uncertainty surrounding Brexit is a concern, although the majority have taken measures to ensure continuity for clients whenever and however the UK does actually leave the EU.
A loss of passporting rights is one of the main concerns for companies and one that has led to the establishment of new branch offices in remaining EU domiciles, as well as the transfer of certain business.
However, A.M. Best explains that for life players in the UK, the loss of passporting rights isnāt such an issue.
āIn contrast to UK-based non-life (re)insurers underwriting specialty or global corporate business, the life segment generally has minimal exposure to cross-border sales using EU passporting rights, and therefore distribution is not significantly affected by the likely loss of these rights,ā says A.M. Best.