Of Special Interest


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20th November 2011

S & P highlights regulatory change for UK life insurers presents challenges but there are long term opportunities

Standard & Poor's Ratings Services has published three reports on the UK Life Insurance sector.
The rating agency comments "In our view, the extent of regulatory change facing the UK life industry in 2012 presents near-term challenges, but long-term opportunities for the sector. We expect regulatory change to reshape the industry and require companies to adapt their business models. That said, it is being implemented while the sector is battling the effects of economic weakness and adverse financial markets. Companies that successfully manage through this period of volatility and regulatory change are likely to benefit from potential longer-term growth
-Regulatory change over the next two years will touch almost all areas of the UK life sector.
-These changes pose a number of risks for the industry as business models are adapted.
-The sector is also facing heightened economic and financial market risks.
-We anticipate that the winners will be those insurers that possess genuine competitive advantage, strong risk management, and operational efficiency.
-In our opinion, UK life ratings are likely to be resilient to these external risks.
The UK life industry faces a wave of regulatory change over the next two years. These regulatory changes will affect almost all areas of a company's business, leading to changes in products, pricing, distribution, competition, and risk and capital management. There will also be not one, but two new regulators: one focused on solvency regulation and one focused on conduct of business. We expect these changes will cause the trend toward lower asset risk exposures and product capital intensity to continue.
During the transition period, as companies adapt their business models to the new environment, they will be exposed to a number of risks relating to new sales, persistency, and expenses. However, when the changes have been fully implemented, and the transitional issues addressed, we consider that the regulatory changes could improve the sector's risk profile.
We expect the winners to be those insurers that possess genuine competitive advantage in products and distribution, strong risk management, and operational efficiency. Insurers that successfully manage the transition will also be well positioned to benefit from the potential longer-term growth opportunities in the sector, including an aging population and the continued shift in the provision of insurance-related benefits from the government and corporate sponsors to the private sector.
At a time of significant regulatory change, the sector is also facing adverse financial markets. In our opinion, UK life insurers' balance sheets have less exposure than many continental European insurers to peripheral eurozone sovereigns, and are less sensitive to interest rate risk. In 2011, UK equity
markets have also experienced less volatility than certain European markets. We consider that these factors, combined with improvements in risk management, have contributed to the resilience of the sector, although the high degree of inter-connectedness between life insurers and banks is a risk factor.
In our view, economic risks for UK life insurers remain elevated. The economic backdrop remains difficult; lacklustre economic growth and high levels of personal indebtedness could constrain near-term growth in assets across the sector. The government's implementation of its fiscal consolidation programme also presents risks for the UK life industry, particularly if this leads to further increases in personal taxation and the erosion of incentives to invest in long-term savings. These risks could be exacerbated by a rise in interest rates, although this is not our base-case assumption in the near term.
At the start of 2011, one-third of ratings in the UK life sector carried a negative outlook, despite rating downgrades for one-in-four companies in 2010, and one-in-two in 2009. This negative trend has abated in 2011; we have recorded no downgrades for the year to date and the proportion of ratings carrying a negative outlook has eased to one-in-six. We consider that this trend highlights our increased confidence in the resilience of the sector to heightened financial market and economic risks. In our view, the ability of companies to adapt their business models and successfully manage regulatory change is likely to be the differentiating factor affecting UK life ratings in the coming years."