Fitch Ratings says in a newly-published comment that UK life insurers have reported a strong set of 2011 results, confirming that most of the sector is sheltered from the sovereign debt crisis in the eurozone. Regulatory capital positions have remained strong, ending 2011 at levels close to the pre-crisis levels of end-2007. This is despite the deepening of the eurozone sovereign crisis and a fall of 6.7% in the FTSE All-Share Index in 2011.
"In contrast to several European insurance groups, most major UK life insurers have negligible direct exposure to the sovereign debt of Greece, Italy, Ireland, Portugal and Spain," says Clara Hughes, Senior Director in Fitch's Insurance team. "Exposures typically amount to less than 5% of shareholders' equity. The notable exception is Aviva, which has significant exposure to Italian sovereign debt supporting its sizeable operations in Italy."
The other major theme of the 2011 results season has been industry concern over perceived threats to the UK life insurance industry from Solvency II, the new risk-based regulatory regime for European insurers scheduled to take effect on 1 January 2014. The ultimate impact of Solvency II hinges on several major decisions still to be made.
"A feature of the UK life sector is the large volume of annuity business," says David Prowse, Senior Director in Fitch's Insurance team. "Under Solvency II, capital requirements for annuities stand to be more onerous, and although industry lobbying against this is having an impact, it is still not clear how much extra capital annuity providers may need."
If the US regulatory regime is not granted equivalence with Solvency II, European insurers may no longer be able to maintain operations in the US, as Solvency II may impose significantly higher capital requirements on them than those that apply locally. However, given the importance of US insurance earnings not just to several major European groups, but also to the European economy as a whole, Fitch believes there will be a political solution, with the US regime ultimately being deemed equivalent.
The UK life sector is preparing for an unprecedented combination of reforms that will transform regulation and distribution, with implications for capital management, product design and pricing. Foremost among these are Solvency II and the Retail Distribution Review. Fitch expects these changes to cause some disruption to the UK life market but expects major insurers to adapt successfully to the new landscape, meaning that the agency maintains its stable rating outlook for the sector.
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