Moody’s Investors Service has changed the outlook for the UK insurance and reinsurance life industry from negative to stable to include predictions of an expected “moderate and manageable” Brexit impact, in a report released recently.
Dominic Simpson, Vice President Senior Credit Officer at Moody’s, said the stable outlook is primarily a reflection of “our base scenario that Brexit’s impact on UK life insurers will be moderate over the next 12 to 18 months, given the resilience of the UK’s economy and financial markets following last year’s referendum.
“Furthermore, we don’t expect the loss of ‘passporting’ to be a material issue for the industry.”
“However, we recognize that material uncertainty remains and that there are clear downside risks to our base case,” Simpson said.
Other factors acting in favour of a stable outlook include low interest rates not posing a key risk for UK life re/insurers, who benefit from generally strong business models and movement into the growing pensions market.
UK life re/insurers’ strong business models and dedicated asset management subsidiaries continue to ensure resilient performance that’s helped along by a strong presence in the growing pensions and retirement products market.
The rating agency explained that while “low interest rates weigh on the investment returns of UK life insurers, they are less susceptible than some of their European counterparts because the majority of their reserves are unit-linked with no interest guarantees.”
“Solvency II capitalisation is comfortable for UK life insurers, who reported year-end 2016 Solvency II ratios comfortably above the 100% threshold.”
In addition, the threat of regulatory intervention is seen as being low after the UK’s Prudential Regulation Authority (PRA) confirmed the full capital benefit of transitional measures.
Low interest rates, strong Solvency II capitalisation and sound business models, coupled with a moderate Brexit impact are all factors expected to ensure continued successful expansion and profitability for the UK life sector despite long-term shifts in the sector or the geopolitical sphere.
However, headwinds could come from regulatory probes, Moody’s said, especially in light of the soon to come results of the Financial Conduct Authority’s review of non-advised annuity sales practices – prompting Prudential UK and Standard Life to each set aside provisions of GBP175 million (gross of any reinsurance recoveries) at end-2016.