Rating agency S&P has marked the U.K. life insurance sector as being one of the few major markets with a low risk assessment, forecast for growth, and spurred on by the expansion to all employers of the automatic enrolment of staff into company pensions this year, but Brexit could challenge the foundation of the underlying stability in coming years.
The U.K. sector benefits from less exposure to interest rate risks compared to its European counterparts, said S&P, highlighting that bulk annuity sales are likely to grow despite falling individual annuity sales and the likelihood of the number of life platforms in the U.K. falling.
The U.S., France, Switzerland, and Australia have also been assessed as low risk; Canada is the only life sector assessed as being very low risk.
In addition, many U.K. life players enjoy the benefit of diversified business models and a lower risk profile compared with many other life markets, reflecting an increased focus on fee-based products, said S&P, explaining that; “although some insurers are still phasing in the final steps of their transformation to a greater focus on fee-based earnings, we do not foresee any further significant effect on earnings from this ongoing shift.
“We believe that profitability will remain resilient in the coming years, although growth and investment returns will experience pressure due to the volatile economic and political environment during Brexit negotiations.”
In line with this sector outlook, S&P has given stable outlooks and ratings on U.K.- domiciled groups, noting that negative outlooks are for company-specific reasons and don’t reflect general market trends.
However, despite the relatively rosy market conditions, the sector is not free of challenges, the prospect of upheaval caused by Brexit could lead to an increase in economic and political risk.
“In our opinion, Brexit continues to present a risk to the U.K.’s track record of strong economic performance and to its large financial services sector in particular.
“We do not anticipate a disorderly Brexit but if this were the case, we would lower our economic forecasts, which would dampen our expectations regarding the insurance industry’s growth prospects.
“A disorderly Brexit could also lead us to lower our sovereign rating on the U.K. from the current, unsolicited ‘AA/Negative/A-1+’ rating. We do not expect a lower sovereign rating to have an immediate effect on our ratings on U.K. insurers,” S&P explained.
Despite the significant political uncertainty looming on the horizon of the UK market, the expectation is that the overall strength of the economic and financial fundamentals will offer a stable operating environment for the life insurance sector.
This echoes the sentiment of a recent CBI/PwC financial services survey, which forecast an optimistic outlook for the sector, but added that scepticism is growing in the broader UK insurance and financial services community over a range of factors impacting the market operating environment and the need for a broad range of actions to ensure that the UK remains a leading FinTech and innovation centre.
Among chief concerns cited are the need to attract talent, accelerate the digitization of services and ensure sufficient investment in technology infrastructure.
The general consensus of industry experts is that the UK life segment is forecast for overall continued profitability and stability in coming years, however, the effect of regulatory changes and political scrutiny, as well as the implications from Brexit and need for innovation will be the main drivers that could influence these factors in the next two years.
