Moody’s Investors Service has placed a negative outlook on the UK life insurance sector amid concerns that a further decline in gilt yields could increase pressure on solvency levels.
A new report by Moody’s also noted how the shrinking UK economy is impacting sales of discretionary life insurance product, resulting in a negative outlook for the UK life insurance industry.
The negative outlook is reflecting off an increased solvency pressure from the COVID-19 pandemic and a strain on earnings resulting from lower sales and investment income.
According to Moody’s, the sector’s capitalisation is currently comfortable. However, it would come under particular pressure if this year’s decline in gilt yields were to reoccur in 2021 and coincide with market volatility and a significant deterioration in the credit quality of fixed income securities. The sector is exposed to significant credit risk via its investments in corporate bonds.
The rating agency predicts that the UK economy will contract significantly during 2020, limiting sales of discretionary insurance products such as life savings policies. A no-deal Brexit would significantly damage the UK’s fragile economic recovery from the coronavirus shock, further pressuring revenues for the sector.
More positively, UK protection writers will remain relatively insulated from coronavirus-related mortality claims and any material spike in claims would also benefit annuity writers, whose main exposure is to longevity risk.
Furthermore, the report explores how UK bulk annuity market has proven resilient during the first half of 2020 and Moody’s expect this market to remain one of the best long-term structural growth opportunities across the entire European insurance sector.
Dominic Simpson, a Vice President and Senior Credit Officer at Moody’s commented on the report: “UK life insurers’ solvency ratios have deteriorated over the course of the year. This reflects coronavirus-induced market movements, in particular falling interest rates and widening credit spreads, as well as dividend payments and capital expenditure.”