The expectation of a moderate and manageable impact from Brexit is the main driver of the change in outlook on the UK life insurance industry to stable from negative, says Moody's Investors Service in a report published today. Furthermore, low interest rates are not a key risk for UK life insurers. However, the life industry's margins could be pressured by ongoing regulatory probes.
"Our stable outlook primarily reflects our base scenario that Brexit's impact on UK life insurers will be moderate over the next 12 to 18 months, given the resilience of the UK's economy and financial markets following last year's referendum. Furthermore, we don't expect the loss of 'passporting' to be a material issue for the industry" says Dominic Simpson, Vice President -- Senior Credit Officer at Moody's.
"However, we recognize that material uncertainty remains and that there our clear downside risks to our base case," adds Mr. Simpson.
UK life insurers' business model has allowed them to maintain resilient performance in the face of increased competition and positions them strongly for the long-term shifts in the sector. Several insurers own a dedicated asset management subsidiary and have a strong presence in the growing pensions and retirement products market, giving them significant asset gathering and fee revenue generation capability.
UK life insurers are less vulnerable to low rates than some of their European peers. While low interest rates weigh on the investment returns of UK life insurers, they are less susceptible than some of their European counterparts because the majority of their reserves are unit-linked with no interest guarantees.
Solvency II capitalisation is comfortable for UK life insurers, who reported year-end 2016 Solvency II ratios comfortably above the 100% threshold. Despite the high reliance on transitionals for the UK life sector, Moody's sees the threat of regulatory intervention as being low as the UK's Prudential Regulation Authority (PRA) has confirmed the full capital benefit of transitional measures.
Regulatory probes, of which there are several, pose headwinds for the UK life industry that could dampen margins. There is particular uncertainty around the outcome of the Financial Conduct Authority's review of non-advised annuity sales practices, prompting Prudential UK and Standard Life to each set aside provisions of GBP175 million (gross of any reinsurance recoveries) at end-2016.
To view the full report click Moody's report, " Life Insurance -- UK: Expectation of a moderate impact from Brexit drives stable outlook,"
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