Credit rating agency AM Best maintains a stable outlook for the UK life insurance segment, highlighting strong growth in pension risk transfers and the positive impact of higher interest rates on investment yields.
Pension-related products continue to drive substantial growth in the UK’s life insurance segment. These products are projected to account for the majority of the segment’s revenue in 2024.
The defined contributions (DC) pension savings market is experiencing significant growth, supported by employee auto-enrolment and higher salaries in response to inflationary pressures.
Pension risk transfer (PRT) business remains a critical revenue stream, buoyed by the favourable interest rate environment.
The Bank of England’s consecutive interest rate hikes have improved the funding ratio of DB pension schemes, making de-risking options more viable for pension scheme sponsors.
AM Best notes that while the pool of relevant DB pension schemes is limited, impacting the demand for PRT solutions, the pipeline of potential PRT transactions remains strong.
Higher interest rates allow insurers to reduce their reliance on illiquid assets, supporting investment earnings. However, AM Best expects illiquid assets to remain a significant proportion of UK life insurers’ investments, given the segment’s long-term liability profile.
The implementation of Solvency UK reform is expected to bring positive changes to the segment. This includes a reduction in the risk margin and revisions to the matching adjustment framework, providing capital relief to insurers on a wider pool of investments.
Funded reinsurance is expected to remain a central tool for the UK life segment to support PRT transactions. While economically beneficial, it may lead to increased credit and concentration risks.
Insurers need to manage these risks effectively through techniques such as diversification of reinsurance panels and over-collateralisation of exposures.
AM Best emphasises the importance of continuous monitoring and attention to enterprise risk management practices to mitigate potential regulatory risks associated with funded reinsurance. Rising scrutiny from financial regulators globally underscores the need for careful risk management in this area.
