Standard & Poor’s Ratings Services today published a report discussing its view of the ongoing regulatory changes in the U.K. life insurance market (see “U.K. Life Insurers Face Hard Choices As Low Interest Rates Coincide With Widespread Regulatory Reform”). These require a strategic response from all players, even the market leaders. At the same time, continued macroeconomic uncertainty serves to constrain the margin for error.
Insurers in the U.K. life sector that are expected to maintain or enhance their credit strength after the regulatory changes will be those with a broad distribution and product base that is not reliant on commission. In addition, those insurers that have access to the market via a number of routes or whose customers have already made the cultural transition to paying for advice will likely gain most from the changes under the Retail Distribution Review. The insurers that can extract value from auto-enrolment will be those that are able to retain and select schemes without weakening their profitability and those that can exploit the opportunity to sell a broader suite of benefits. Overall, a dip in new life sales appears likely over 2013 and 2014 as the market readjusts.
Across the industry, capitalization remains robust and has benefitted from significant reductions in risk. Furthermore, S&P considers the balance sheets of the U.K. life sector to be liquid. Most liabilities to which shareholders are exposed are long-dated, and illiquid. These liabilities are, in general, matched with highly liquid and highly rated bonds.
