UK Life Insurance Sector Faces Uncertain Times Amidst Economic Crisis and Solvency II

Strategic Insights -

As the global economic crisis continues to impact the life insurance sector in the UK, industry experts warn of uncertain times ahead. According to Vasilis Katsipis, general manager of analytics at A.M. Best Co. in London, 2008 was "probably the worst year for the life insurance market in the U.K. in the last 20 years." The sector has faced challenges on both the product and investment sides, with the credit crunch devastating stock market valuations and spurring massive government aid to the banking sector.

Key Takeaways:

  • The UK life insurance sector faced significant challenges in 2008, with problems on both the product and investment sides, including the credit crunch affecting stock market valuations.
  • Solvency II, due to take effect in October 2012, will introduce a uniform regulatory system for insurance and reinsurance within the EU, replacing disparate capital requirements.
  • The sector's reliance on equities is exacerbated by high levels of embedded guarantees in life insurance products, making high yields necessary to pay these guarantees.
  • Insurers will face a challenge in working out the effects of Solvency II on capital requirements for different parts of their organizations.
  • One area of attention could be annuities, with the potential for revaluation that may be "not beneficial" to insurers.
  • Tougher capital requirements from Solvency II could increase costs for UK life insurers, potentially by as much as 20%.
  • Consolidation within the UK life market is predicted, with some organizations facing problems due to a lack of capital and weak profitability.
  • The sector must re-examine its products, many of which are unprofitable, and consider moving away from these offerings due to the pressures of Solvency II.
  • Katsipis does not predict an influx of U.S. or continental European life insurance groups into the UK, despite the removal of the perception of over-regulation.

Statistics:

  • The UK life insurance sector faced "probably the worst year in the last 20 years" in 2008.
  • The credit crunch devastated stock market valuations, spurring massive government aid to the banking sector.
  • The sector's reliance on equities is exacerbated by high levels of embedded guarantees, requiring high yields to pay these guarantees.
  • The UK market for bulk annuities is worth around £1 billion to £2 billion, and its value increased to around £8 billion by 2008.
  • Private sector business in the UK is potentially worth up to £1 trillion, with public sector business being even greater.

Sources:

  • A.M. Best Company, Inc.
  • Vasilis Katsipis, general manager of analytics at A.M. Best Co. in London
  • Ed Jervis, chief executive of Paternoster Ltd.
  • Rob Sewell, chief financial officer of Pension Corp.