AM Best is reportedly maintaining a stable market segment outlook on the life insurance market of the United Kingdom, as outlined in the firm’s latest Best’s Market Segment Report.
Entitled “Market Segment Outlook: UK Life”, the report included several key factors that led to this outlook. The list includes strong growth opportunities focused on defined contribution pensions and annuities, bigger allotments to illiquid assets like stocks and collectibles, and enterprise risk management (ERM) practices executed by carriers.
Although the outlook is generally positive, AM Best notes in the report the persisting regulatory uncertainty following U.K.’s impending departure, dubbed Brexit, from the European Union. The rating firm says that this creates greater risks to insurers in terms of investment, in addition to the risk of capital for large insurers with subsidiaries outside of the UK but still within the EU no longer becoming as freely exchangeable as before.
The outlook for life insurers in the UK is now dominated by pension-related products. There used to be more common options for insurance customers before, such as with-profit policies and investment bonds, both of which have already declined in market standing.
With-profit products, specifically, have already withered away to the point that many insurance companies no longer give them much focus, even though they used to be the primary products of the UK savings and investment market. In fact, Barnett Waddingham partner Scott Eason says that with-profit policies are “unacceptable and makes it extremely hard for customers.”
Meanwhile, pension reform has caused UK life insurers to focus more on products that show strong growth over short and medium terms rather than long term. This is mainly because of the gradual acquisition of defined contribution assets, in addition to bulk annuity transactions or the traditional policy offered by life insurers in the UK. In bulk annuity transactions, the pension scheme for the over 65 years old pays a premium while the insurer writes an annuity in exchange that will pay the retirement income of a large part of a scheme’s retired pensioners.
AM Best also says that many life insurers in the UK are mostly operating in B2B or business to business marketing environments. In these environments, consultants and advisers with a profile that is mainly corporate play a significant role.
Since agent and broker distribution channels have already diminished, though, companies are now looking towards digital spaces to general individual sales. This move may help them still preserve a retail presence, despite the major overhaul happening in their sector.
With regards to illiquid assets, AM Best believes that putting higher allocations to these assets is a fitting way to create value from the role of insurers to gather illiquid liabilities. It does require careful management though, considering the growing scale of such a move. The firm says that accumulated skillsets related to illiquid assets can bring about various challenges and opportunities into focus. One example given by AM Best is the optimization of the availability of predicted returns from these assets to defined contribution pension savers.
