No-deal Brexit to hit insurers hard after COVID-19 strain on earnings: report

A 'no-deal' Brexit would lead to greater economic and market contraction, further pressuring revenues of the UK insurance sector that is already struggling from the upheavals triggered by the coronavirus pandemic, analysts have warned.

According to Moody's, the UK's economy is likely to "contract significantly during 2020", limiting sales of discretionary insurance products such as life savings policies.

The agency's outlook for the UK life insurance industry is negative, reflecting increased solvency pressure from the pandemic and a strain on earnings resulting from lower sales and investment income.

“UK life insurers’ solvency ratios have deteriorated over the course of the year,” said Dominic Simpson, a vice president and senior credit analyst at Moody’s. “This reflects coronavirus-induced market movements, in particular falling interest rates and widening credit spreads, as well as dividend payments and capital expenditure.”

In its new report, Moody's highlighted that the sector's capitalisation is currently comfortable. However, it would come under particular pressure if this year's decline in gilt yields were to reoccur in 2021 and coincide with market volatility and a significant deterioration in the credit quality of fixed income securities. The sector is exposed to significant credit risk via its investments in corporate bonds, it said.

On the other hand, the report noted that UK's protection writers will remain relatively insulated from COVID-19-related mortality claims, and any material spike in claims would also benefit annuity writers, whose main exposure is to longevity risk.

Furthermore, Moody's said the UK bulk annuity market has proven resilient during the first half of 2020 and is expected to remain one of the best long-term structural growth opportunities across the entire European insurance sector.