Fitch anticipates surge in UK life insurers’ bulk annuity sales and funded re

Fitch Ratings anticipates UK life insurers’ bulk annuity volumes to continue rising in 2024, surpassing £60 billion, with funded reinsurance (funded re) becoming increasingly prevalent.

In 2023, bulk annuity sales reached a record high of nearly £50 billion, reflecting a remarkable increase of over £20 billion compared to 2022.

Fitch explains, “Demand from corporates to offload their pension liabilities to insurers was strong, spurred by better affordability due to improved pension scheme funding levels following interest rate rises.”

Analysts anticipate sustained growth in transaction volumes throughout 2024, driven by strong demand. Consequently, funded re is expected to gain more prominence.

However, Fitch warns of potential risks if insurers overly rely on a small number of credit-focused reinsurers. Nevertheless, tight regulation and diversified panels of highly rated reinsurers will mitigate these risks, with the sector expected to limit funded re usage to below 30% of bulk annuity premiums from 2024 to 2026.

The report highlights that UK life insurers maintained robust Solvency II (S2) ratios in 2023, which are expected to persist in 2024, aligning with their cautious risk appetites.

Despite these positive trends, the sector faces profitability challenges from consumer duty rules introduced in 2023. These rules require UK financial firms to prove fair pricing to customers. Some insurers in wealth management are under scrutiny by the Financial Conduct Authority (FCA), possibly leading to refunds for poorly evidenced charges. St. James’s Place has already set aside funds for this purpose.

Older products, sold before July 31, 2023, but not marketed since then, will be subjected to these rules. While some insurers may adjust charges, a surge in compensation claims is not anticipated. The FCA clarified that these rules won’t apply retrospectively, raising uncertainty about calculating losses without comparable products.

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