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UK insurance industry set for revamp: S&P

24th April 2023 - Author: Akankshita Mukhopadhyay

Due to uncertain economic conditions, life and non-life insurance companies in the UK need to reconsider their capital allocation, product strategies, and business models, according to S&P Global Ratings.

S&P Global RatingsThe U.K. insurance industry is set for a revamp. UK insurers need to reconsider their capital allocation strategy due to the current economic climate, including high interest rates and the possibility of a recession, the rating agency noted.

They also need to adapt their product offerings to account for demographic, climate, and technological changes, while balancing strategic goals with stakeholder demands and maximizing risk-adjusted returns, it added.

“Management teams at U.K. insurance companies are grappling with competing pressures from various stakeholders,” S&P Global Ratings credit analyst Simran Parmar said.

“In their attempt to harmonize often diverging demands, we have seen several U.K. insurers rehaul their business models, for example by divesting operations, rebasing capital strategies, or seeking external and inorganic growth via consolidation,” Parmar added.

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To maintain their position in the UK economy, UK life insurers must secure long-term funding from investors with matching objectives and realign their operating models and investment strategies with new shareholders. While, also deciding whether to be a large-scale generalist or a specialized fund manager, battling cyclical markets, and building or buying capabilities at significant cost.

S&P Global Ratings noted that UK insurers face challenges in maintaining strong balance sheets and managing asset and liability risks amid volatile financial markets, rising funding costs, and demographic trends, with growth and earnings potentially being volatile.

The upcoming Solvency II reforms in the UK could allow for more flexibility in asset allocation and capital release, but insurers’ risk appetites and approach to additional capital release will be important factors in determining their creditworthiness, the rating agency said.

Pension reforms and the dominance of defined contribution pension products present growth opportunities for UK insurers, particularly in the bulk annuities market.

Real estate may be vulnerable, but equity release mortgages and rental covers could become growth areas, the report noted. Evolving wealth management needs for consumers highlight the need for growth products that come with financial advice and secure income, such as fixed annuities or guaranteed savings, it added.

“U.K. insurers that successfully make the most of these growth trends and innovate to cater to new demands and risks could further cement their competitive positions and develop sustainable earnings and capital profiles, supporting their creditworthiness.”

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