Moody’s Investors Service expects UK life insurers to experience reduced capital and profits in the event of a no-deal Brexit scenario, as well as more limited growth prospects.
The rating agency considers UK life players as particularly exposed to a no-deal outcome given their high asset leverage, their significant exposure to UK investments, and the discretionary nature of some life products, whose sale are correlated to the economic cycle.
Analysts suggested that a no-deal Brexit scenario would produce financial market volatility, eroding capital and putting pressure on investment income.
This could also damage Solvency II capital positions by pushing up capital requirements and reducing asset values, Moody’s said.
Additionally, a combination of weaker economic growth in the UK and business and consumer uncertainty is likely to weigh on life insurers’ revenues and operating profits in the short to medium term.
“If the UK leaves the European Union without an agreement, life insurers will suffer in the short to medium term,” said Dominic Simpson, VP-Sr Credit Officer at Moody’s.
“First, financial market volatility may erode capital and pressure investment income,” he explained. “Second, a hit to the UK economy may reduce revenue and earnings potential.”
Nevertheless, Moody’s current base case is still that the European Union and the UK will reach an agreement.
It also believes that operational risk will be manageable in the event of a no-deal Brexit, as most UK life groups that operate in continental Europe do so via local subsidiaries.
These subsidiaries will be able to continue operating even though their UK parents would lose their EU passporting rights.
Furthermore, most UK life insurers increased their operating profit again in 2018, and Moody’s expects the sector to continue to benefit from a number of favourable market shifts going forward.
These include rule changes that give savers more freedom to manage their retirement savings, as well as structural shifts such as pensions auto-enrolment, and the move from defined benefits to defined contribution schemes.