24 November 2020Insurance

Low interest rates to hurt profits of UK life insurers in 2021, warns Fitch

The UK life insurance sector will face increasing pressure on profitability as interest rates stay lower for longer, warns Fitch Ratings.

A new report suggests that interest rates are likely to remain low for longer than previously expected amid the slowdown in demand and general weakening of the UK economy following the coronavirus pandemic.

Fitch highlighted that the UK life insurance sector's outlook for 2021 is worsening, driven by lower interest rates in 2020 and substantial downside risks to interest rates and credit markets in 2021.

The agency expects that an 'even-lower-for-longer' interest rates environment and more downgrades will add pressure to insurers' capital positions through increases in Solvency II capital requirements and risk margins.

Moreover, lower interest rates could also reduce insurers' profitability through lower spread margins, lower fee income on investment products and lower investment returns earned on invested premiums.

Fitch believes that insurers' credit exposure to defaults and downgrades in their fixed-income investment portfolios will remain a key risk in 2021, due to the ongoing economic uncertainties related to the pandemic.

However, it expects the strong demand of the bulk annuity market to continue in 2021.

Fitch is currently maintaining a stable rating outlook for the UK life insurance sector, reflecting "insurers’ strong capitalisation, resilient operating profitability and very strong business profile".

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