UK life insurers are facing material longevity risks as the sector undergoes significant change leading to increased diversification of business and products and spurring demand for longevity reinsurance uptake, according to a recent S&P report.
“Historical sales of individual annuities mean that longevity risk will still be material in the future.
“However, we see longevity risk being increasingly transferred to the reinsurance market, although the total amount ceded (while increasing) remains a small proportion,” S&P said.
The UK life insurance market is in a period of flux, due to increased pension freedom and enhanced customers awareness of savings and retirement planning, S&P noted a sustainable downwards trend in the sale of individual annuities and greater emphasis on more flexible options, such as income drawdown, together with equity release policies.
However, these changes aren’t expected to mitigate UK life insurers’ longevity risk in the next few years, although a trend reversal in life expectancy, indicated by the U.K. actuarial association, could bring about a gradual decline in this risk.
Brexit reforms are a further factor contributing to a turbulent risk landscape for UK life insurers, government reforms include a ban on commissions for retail investment sales.
“From this, we have seen a big drop in commissions paid by life insurers, and a significant change in the assets advisers are recommending to clients (for e.g., the sale of UL bonds has slowed),” said S&P.
Conversely, a positive trend for life insurers has been an increase of assets on investment platforms that allow customers to hold several types of investment products on the same system.
In addition, The Pension Schemes Act 2015, which has given people significantly more control over their pension savings, has brought about dramatic change in that people can now access their defined contribution pension as they wish from the point of retirement, and use it as they wish.
In the past, people were forced to buy an annuity with their pension savings, and S&P noted a consequent “material drop in individual annuity sales since its implementation.” Auto pension enrollment, which provides employees with an easy way to save toward retirement, has also driven growth in group pension plans.
In S&Ps view, life insurers have been adapting to the changing market environment, and have responded to consumer demand by leveraging new opportunities such as flexible savings products; having a greater array of product options has increased the need for advising consumers, and retirement planning is receiving greater political attention.
Despite these significant risk-management actions taken by insurers over the past decade aimed at reducing risk in portfolios and increasing the use of hedging, significant longevity risk remains a key concern for UK life insurers, and one that is likely to spur uptake of longevity reinsurance.
