The UK life insurance sector is the only one with an improving outlook within Europe, according to a new note from Fitch Ratings.
According to the agency, this is most likely due to increasing business from pension schemes looking to transfer risks, a trend that Fitch said is likely to increase as the economy recovers from the pandemic. In a graph accompanying the note, Fitch estimated that UK life sector buy ins and buy outs numbered 28 in 2021, slightly down from 32 the year before. However, it forecasts that this will rise to 40 and 50 this year and in 2023.
Fitch Ratings said: “Volumes of buy-ins and buy-outs declined in 2020 and 2021, which we attribute to the negative impact of pandemic-induced financial market volatility in 2020 on funding levels and confidence to transact. The transaction timeframe, from initiation to conclusion, is typically nine to 12 months.”
The authors added: “Volumes are likely to recover strongly in 2022 and 2023, underpinned by strong structural demand. Rising bond yields would support the trend as they would improve funding levels and affordability. We expect the market to grow for another five years, with volumes peaking around 2026. However, volumes may be lumpy from one year to the next given the large size of some deals.”
It has been no secret recently that pension risk transfers have been on the rise in the US and UK, with L&G predicting this week that the second half of 2021 was particularly strong for this sector. In the US, the company recorded an estimated $38-40bn (£28-30bn) in total annual transaction volume, which far surpasses the $27bn reached in 2020.
Last year’s volume was spurred on by an increased number of large-to jumbo transactions and the improved funding status of Defined Benefit pension plans due to strong investment returns and rising interest rates.
Meanwhile, in the UK, L&G reported that the second half of the year was one of the largest and busiest six-month periods in the history of the market, with around £22bn of retirement income secured.
Overall, the insurer estimated the total transaction volume for the year approached £30bn, with growing demand driven by a number of factors, including improved pension scheme funding levels, and competitive longevity reinsurance pricing.
The health of the UK life sector, said Fitch, was also underlined by increasing inflows into unit-linked funds, which was driven in the main by the growth in workplace retirement savings schemes. Net inflows, Fitch said, should continue to increase this year, supported by the economy and despite pressure from higher inflation.
The agency added: “Strong inflows into savings products are also a theme in several other European life sectors, including in France and Italy (unit-linked products) and Germany (hybrid products with limited investment guarantees). French life insurers have seen record unit-linked net inflows following their strategic initiatives in recent years to reduce their reliance on traditional, capital-intensive savings products. This has helped to safeguard their credit profiles from the effects of ultra-low interest rates.”
