In a recent report, Fitch Ratings (Fitch) has projected an optimistic trajectory for the UK life insurance market in 2024, attributing the positive forecast to robust sector fundamentals and a more favorable operating environment. Notably, the UK stands out as the sole life sector in Europe displaying signs of an improving outlook for the year.
Despite macroeconomic and financial market challenges, Fitch anticipates that the UK life insurance market’s improved conditions will persist. The credit rating agency specifically expects the pension risk transfer market to sustain strong growth throughout the year. This growth is driven by heightened demand from corporations looking to de-risk their balance sheets, a consequence of improved pension scheme funding levels resulting from interest rate increases over the past 18 months.
Rishikesh Sivakumar, Associate Director at Fitch Ratings, emphasized, “Our improving outlook on the UK life insurance market is driven by strong sector fundamentals and our expectation of a more favorable operating environment in 2024.” He highlighted the increased corporate appetite for de-risking balance sheets, buoyed by improved pension scheme funding levels amid higher interest rates, supporting robust growth in the UK pension risk transfer market.
Fitch underscored the pivotal role played by higher interest rates in boosting pension scheme funding levels. This, in turn, facilitates the offloading of pension liabilities to insurers for corporations. While the life sector outlooks for the rest of Europe remain neutral due to a muted macroeconomic backdrop, Fitch expects the UK asset and wealth managers operating in the workplace retirement segment to benefit from resilient inflows. Fiscal incentives and the auto-enrolment system are anticipated to contribute to this positive trend.
The report also notes the recovery of the individual annuity market, with major insurers reporting sales growth. Fitch attributes this recovery to volatile investment markets and high interest rates, which have bolstered individual annuity volumes in 2023.
Looking ahead, Fitch anticipates that the capital position of most life insurers in the UK, along with their liquidity profile, will remain “very” strong. This strength is attributed to high interest rates, resilient capital generation, and sophisticated assets and liabilities management techniques. While acknowledging exposure to credit risk in investment portfolios, Fitch highlights the well-diversified nature of insurers’ asset portfolios and low default rates.
Conversely, in terms of income from retail savings, Fitch suggests that clients are expected to remain cautious and selective. Despite the potential impact of inflation on disposable incomes, the agency notes that high retention rates are likely to partially offset sluggish inflows.
