UK life insurers could allocate up to £170bn to illiquid investments over next decade - Fitch

Written by Adam Cadle

22/12/2020

UK life insurers could allocate up to £170bn to illiquid investments over the next decade, Fitch Ratings has said.

A substantial portion of this allocation is expected to be focused on the creation of new environmentally sustainable assets.

“We believe that annuity writers investments into sustainable assets will continued to grow on the back of strong demand from corporates seeking to offload risks related to legacy pension scheme,” Fitch Ratings said. “Annuity writers invest in illiquid fixed-income assets with reliable long-term cash flows to match illiquid long-duration annuity liabilities.”

The transition to a more sustainable economy is necessitating UK life insurers to demonstrate the long-term resilience of their investment strategies. Difficulties in transitioning away from out-of-favour assets and risks related to stranded illiquid legacy assets remain however.

“Given possible rating impact beyond our typical two-year rating horizon we therefore see limited implications on current ratings or outlook,” Fitch stated.

“We believe that climate-related risks and opportunities mainly impact UK life insurers' investment strategies, rather than through a material change on their overall business model. The long-term nature of life insurers' investment portfolios exposes them to future financial risks from climate change, including changes in government policies and public attitude towards non-sustainable industries and companies. We believe that this early implicit adoption of sustainability considerations will help to mitigate future financial risks from climate change.”

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