“The bedding down of new insurance regulations will continue to be important through 2017. Even in the event of a hard Brexit or other political change, Solvency II is unlikely to fall away — although some of its more cumbersome features, such as the provisions on matching adjustment, could be softened in future. Ironically, Brexit may impact continental insurers more than their UK peers. The short- to medium-term uncertainty caused by the vote in June that led the Bank of England to lower policy rates, has had the knock-on effect of exacerbating ‘lower for longer’ expectations about fixed income yields. German, Norwegian and Swiss insurers are likely to be more affected than their UK counterparts due to substantial mismatches between asset and liability durations.
“Insurance companies are meanwhile in the process of interpreting the regulations that have already come into effect. While most insurers chose to use the standard formula for calculating their solvency capital during the first year of Solvency II’s implementation, some may wish to shift to the use of an internal model instead in future. This aspect of the regulation brings its own challenges, as even when following the standard model not every insurer uses the same set of calculations. The use of internal models brings an additional layer of complexity, although the implications for asset allocation are unlikely to vary widely as both approaches restrict investment strategy.
“Achieving a higher return on capital in Solvency II’s highly constrained environment is a major challenge. Some asset classes receive more favourable treatment than others under the framework. For example, the 25% capital charge on property assets is modest when compared to a roughly 49% charge on illiquid equities. In the UK, commercial property is yielding approximately 5%, making it a compelling investment when the capital charge is considered.”
Columbia Threadneedle head of insurance solutions Eugene Dimitriou
1) The UK insurance industry amidst a challenging environment
“The single biggest challenge for insurers today is probably low investment returns. Insurers are searching for ways to address this. For example, as many traditional asset classes continue to offer low yields, insurers are looking for alternatives that will enable them to maintain or grow their investment returns while alleviating the impact of market volatility. As the pressure of increased regulation continues to bite with MiFID II and PRIIPS fast approaching, the challenge is made even more complex."
2) Business challenges
“The life insurance market faces reform of pension regulations, which will continue to provide both opportunities and threats. The decrease in individual annuity business and the opening up of the drawdown approach to competition from non-insurance investment managers requires a product response for the “at retirement” generation and a frequently changing tax environment needs to be navigated if life insurers are to remain competitive in the pensions saving space.
“Margins will continue to be squeezed - resulting from downward pressure on fees, steered by regulators and government - as is evident from the fee cap on the new auto-enrolment scheme and the FCA investigation into exit fees.
“On the upside for some life insurers many companies will undoubtedly be looking for buy-out and other opportunities to reduce their exposure to the pension risk of open and closed defined benefit pension schemes. The specialists in this area could be looking at a very attractive business environment. Some have already announced plans to increase capital to enable them to capture these opportunities.
“Looking at general insurance, some segments are seeing ongoing competitive pressure weighing on premium rates. This can be seen specifically in the reinsurance space where excess capital and low catastrophe losses will continue to create challenges in 2017. Furthermore alternative reinsurance products should continue to grow and develop in the year ahead, although the speed of this will be reduced as a result of lower margins. Motor insurance is slightly more positive, where premium increases are beginning to be seen. However 2017 will also see the insurance premium tax’s new rate become applicable to all premiums from 1 February, whatever the contract’s start date. It is therefore likely that rising insurance taxation will continue to be a topic of discussion throughout 2017."
3) Merger & Acquisitions
“The challenge of achieving meaningful growth is well known in the UK insurance industry. The low level of growth in the UK market could result in more M&A activity. Overseas buyers view UK insurers as cheaper, this is partly a result of the depreciation of sterling. Asian buyers are likely to be on the lookout for new deals. However the uncertainty around the impact of Brexit may hinder the appetite of some of these players, at least towards the beginning of the year, while others may actually view this as an opportunity."
AXA IM head of insurance solutions UK Chris Price
"One of the main challenges is integrating the insurance company’s risk management framework into the asset management practices, to ensure alignment of processes, reporting and indeed culture. This is particularly pertinent given the FCA’s increased focus on the efficiency and effectiveness of asset managers’ risk management. Where an insurance company has a separate asset management business, they will need to evidence appropriate risk management through the ICAAP."
Crowe Horwath partner Daniel Bruce