Asset risk remains main component of UK annuity writers’ target capital

Written by Adam Cadle

23/02/2023

Asset risk is still the main component in UK annuity writers’ target capital, representing nearly a half of total undiversified Prism Factor-Based Model (FBM) target capital at end-2021, Fitch Ratings has said in a new report.

Annuity writers invest new premiums into credit risk assets to earn credit and illiquid risk premiums and reinsure a significant part of their longevity exposure.

Annuity writers’ capital positions remained supported by a significant amount of Solvency II-eligible subordinated debt – around a quarter of total available capital at end-2021. However, Fitch said it considers subordinated debt as a ‘soft’ capital element and does not include it in Fitch Core Capital. Overall, UK life insurers’ capital quality has improved in 2021, largely following the growth of net equity – a higher-quality capital in the Prism FBM model.

Fitch does not expect significant changes in Prism FBM scores following the adoption of IFRS 17 accounting rules by UK annuity writers, as business fundamentals and capital positions remain strong.

"We also do not expect any material changes to the asset risk target capital following the adoption of IFRS 9, as the exposures are currently reported on market values, to the extent possible, by UK insurers," it stated.

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