The UK life insurance sector is the only life sector in Europe with an improving outlook for 2024, which is largely due to the prospect of strong profitable growth in pension risk transfers, says Fitch Ratings.
The agency highlighted how higher interest rates have boosted pension scheme funding levels, ultimately making it easier for corporates to offload their pension liabilities to insurers.
Elsewhere in Europe, life sector outlooks are neutral, with the positives, such as higher investment returns, broadly in balance with the negatives, such as the muted macroeconomic backdrop, noted Fitch.
While higher investment returns are a positive for life insurers’ earnings, Fitch warns that new business volumes for many product lines will be dampened by slow economic growth and pressure on households’ disposable income.
Importantly, pension risk transfer business – which is much more common in the UK – is an exception because it is sourced from pension schemes rather than disposable income, and volumes tend to be boosted by higher interest rates, Fitch explained.
It is critical to remember, that demand to transfer pension risk comes from organisations no longer willing to bear the financial risk associated with defined-benefit staff pension schemes. This particular schemes were once common across the UK and, even though most are closed to new entrants and future accruals, their liabilities are significant.
Moreover, Fitch noted that it expects UK pension de-risking volumes in 2023 and 2024 to exceed the previous record in 2019, prompted by much better affordability for transferring risk following the steep interest rate rises seen in 2022-2023.
Even though pension superfunds could encroach on the UK life market for pension risk transfers Fitch expects the near-term impact to be small relative to the expansion of the market.
Additionally, Fitch also expects the individual annuity market to grow in 2024. The agency explained that this growth should be driven by retirees attracted by annuity rates that have risen largely in step with bond yields.
Inflows into insurers’ workplace retirement savings schemes are also expected to increase due to a combination of salary inflation and fiscal incentives, however pressure on households’ disposable income will dampen the impact, Fitch noted.
