UK life insurance sector outlook revised to negative

Written by Adam Cadle

18/03/2020

The UK life insurance sector outlook has been revised to negative from stable in light of the coronavirus outbreak, Fitch Ratings has said.

The change in the outlook is based on the significant uncertainty created by the global coronavirus pandemic, which has resulted in high levels of volatility in capital markets. This, in turn, has resulted in a sharp drop in interest rates, as well as significant variability in stock prices and credit spreads.

“In our view widespread downgrades in corporate bonds could have a significant impact on UK annuity writers’ profitability and solvency position, despite insurers’ limited sensitivity to widening credit spreads under Solvency II,” Fitch underlined.

“We believe that downgrades of lower-rated investment-grade corporate debt would lead to a rebalancing of assets by insurers, which results in loss recognition. UK annuity writers are also exposed to credit risk through its illiquid investment portfolios, which includes commercial and real-estate backed lending. However, market risks as a result of Covid-19 are somewhat offset by duration matching of long-term liabilities and favourable experience variance of life expectancies relative to their long-term longevity assumptions.”

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