UK life insurers are likely to maintain strong capital commensurate with ratings despite the reduction in capital requirements born by Solvency II, says a new note from Fitch.
According to the agency, the UK government announced plans in February to help free up £10bn of capital, with encouragement for it to be invested into infrastructure. While many insurers will choose to do this, said Fitch, it anticipated that most will stay within their risk appetites and will try to avoid jeopardising ratings.
The agency wrote: “We expect insurers would see the new rules primarily as an opportunity to take on more investment risk rather than to reduce their reinsurance protection, for example. In light of the proposals, we estimate that the sector could allocate up to £200bn to illiquid investments over the next ten years. This compares with our previous estimate of £170bn for the ten years from end-2020.”
However, the agency said that lighter capital requirements could reduce the fees insurers charge to accept pension risk transfers, leading to a boost in business.
Fitch wrote: “We already forecast significant growth in pension risk transfers, underpinned by strong structural demand and the post-pandemic recovery in pension scheme funding levels. However, an increase in insurers’ demand for illiquid assets due to a lighter capital burden could push down the investment yields available, particularly as illiquid assets of suitable credit quality are often in short supply. This could limit how much the sector might benefit from the government’s plans.”
